Tuesday, 17 August 2010

Book Review: Investing in Renewable Energy by Jeff Siegel, Chris Nelder and Nick Hodge

Not really a book about investing, this book is an introduction to the various sectors and technologies that make up renewable energy and a polemic that society needs to adopt it and fast. The authors take a highly positive stance to the point of boosterism towards renewable energy, touting all the positives but ignoring or skimming the negatives, citing such as mere impediments that will quickly and easily be solved (e.g. the fact that wind does not blow reliably all the time to generate power when it is needed and the NIMBY view-spoiled opposition it engenders).

The other major missing element to make the book a really useful tool for the investor is to recognize the difference between an important and probably inevitable economic, technological and societal change and the success or failure of individual companies. The inevitable growth of renewable energy does not mean the inevitable profitability of all or even most of the companies investors may be faced with. In fact, I would expect that the energy transition will play out exactly as with other big new technological changes - a small minority, a tiny handful of companies will do extremely well, while a good number will succeed reasonably well and the majority will crash and burn. We have the recent lessons of the Internet and the dot com era to guide us.

In other words, I would want an investor-oriented book to guide me through the factors specific to renewable energy companies I should be paying attention to. What are the revenue ratios and cost factors? What are the special operational factors that make or destroy profitability in the various renewable sub-sectors? None of this is found in the book.

For example, the chapter on geothermal energy mentions Ormat Technologies (NYSE: ORA), calling it " ... the best of breed among the publicly traded geothermal companies." There's even a nice chart showing the rapid rise in share price between 2005 and 2008 (when the book was published). Fast forward to today and look at this Google Finance chart snapshot of ORA below - not so impressive anymore.

The latest Ormat results reported a loss due to "... low generation and high operating costs at the North Brawley power plant". It seems that making money in geothermal is not as simple as drilling a hole in the ground. So, is this the time to snap up Ormat stock? The book doesn't help me at all to decide by giving the tools and techniques to do the proper assessment.

To a minor degree (only, since there is considerable real content on the renewable sector), the book suffers from a touch of infomercial disease - promotion of the authors' website where you can subscribe / pay for all the latest hot news in their investor newsletters, complete with stock tips. One can expect there what can only be called recommendations for speculation, not long term investing, according to this statement: "... we'll be reporting on it [a reference to a solar power project in New Mexico] to all our readers so they can get in early on these, too; this will give them an opportunity to take up an early position, then cash out once the rest of Wall Street catches up and pushes the stock north." (p.51) Hmm, is that like recommending Ormat on March 3, 2009 at $25 with a 12 month target of $41 in 3 Stocks to Play in a Down Market? Siegel is sticking to his guns though, he's still recommending it.

To my disappointment, and perhaps to my friends who installed one of their geothermal heat pumps as described in yesterday's blog post, the book doesn't mention WaterFurnace (TSX: WFI), a smaller company that is still making profits, paying dividends and increasing sales, despite the poor housing market. The stock price has been stagnant for several years. Is this a value play? On the other hand, maybe flying under the radar is a good thing.

Making money on green chip stocks, as they put it in the book's sub-title, requires more than anticipating when fads and psychology will generate temporary emotional enthusiasm to push up a stock price. For the real investor, trying to look years ahead, it requires difficult reasoned comparative analysis of present and near-term alternatives, with number crunching and diving down into the business model of companies, as well as evaluating the skill of company management.

My rating: 2 out of 5 stars


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Financial Cents said...

Not a great read eh? Good to know - thanks for the post.

CanadianInvestor said...

FC, no not a great read but onto a better book now

Geothermal Heat Pumps said...

There is also another geothermal heat pump company that produces quality geothermal systems... check them out: http://www.geothermalheaters.com/

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