How To Invest In Clean Tech Stocks?

The year 2011 proved to be a year for clean technology deployments but the sector underperformed due to concerns about sovereign debt, regulatory changes, and increased competition. But, the clean technology industry is expected to benefit in 2012 and could be an important avenue for long-term investors.

Clean Technology encompasses a wide range of industries including solar, wind energy, smart grids, LEDs and biofuels. The industry stands to benefit from powerful secular trends in favor of more efficient use of resources with lower carbon footprints.

"We believe 2012 will be better and note that long-term secular drivers (depleting hydrocarbons, environmental concerns, energy cost arbitrages, etc.) should continue to drive further investment," Jefferies analyst Jesse Pichel wrote in a note to clients.

Following are some tips from Pichel over stock selection within clean tech industry:

• While the debate over climate change appears largely settled in light of record-breaking extreme weather events, the analyst believes the debate over how to deal with climate change and its impacts is only beginning. Low carbon or energy-efficient technologies could see an accelerated adoption cycle due to positive regulatory environment.
• Companies that can reach profitability without regulatory support should do well. Business models need to be resilient, as "unforeseen" events are all too frequent. For instance, wind turbine manufacturers have been severely impacted by the growth in shale gas in the United States. This put downward pressure on electricity prices which in turn negatively impacted wind project viability.
• New technologies need to be cost competitive and scalable, so as to earn an adequate return on the initial investment in R&D and process know-how. This has been somewhat more challenging given the often capital-intensive nature of the energy industry, but software for managing smart grid, solar generation, and energy efficiency is an example of a more scalable technology.
• It is not enough to deliver sustainable value to an industry. Companies also need to capture their fair share of earnings. Many clean technology areas involve attempts to earn high returns on capital supplying components to commodity industries. Pichel believes these are more vulnerable to competition than companies with a more robust approach to capturing value through differentiated solutions or sales models and views pricing power as a more sustainable driver of premium valuations than volume growth.
• Capital intensive projects may need to be "de-risked" in order to obtain project finance. This could constrain the returns available to equity holders, particularly for projects that combine new technologies in ways that have not been attempted before. Technology suppliers into commodity businesses could also see pressure on returns.