Clean Tech - The Next Big Thing?

A couple of weeks ago an article in the Daily Telegraph business section by Tom Stevenson highlighted the growing interest from investors in the “clean tech” sector, notably solar and wind power companies. He quoted New Energy Finance, a supplier of research and data to investors, who reported that more than $117bn was invested worldwide in clean tech last year, a 41% increase on the year before.

He also quotes a number of fund managers who are universally optimistic about prospects for this sector. Here are two examples.

“The scale of the challenge of moving on from fossil fuels makes this an attractive area for long-term investment. This industry could sustain growth rates of over 20pc per annum for more than 20 years”. – Tom Guinness, Guinness Alternative Energy Fund.

“As an investor in 20 years, will you look back and wonder why you did not read the signals? The global market for environmental goods and services is incredibly exciting and we believe that within the climate change funds you may find the Microsoft of the future”. – Mark Haskins, partner at Holden.

However Tom Stevenson also draws some parallels with the dotcom boom, funds queuing up to invest, stock prices driven up to unsustainable levels (he reports p/e ratios of 30 or 40 as being typical), followed by sudden stock price falls of up to two thirds in a few months in certain cases.

So what is going on? Could you trust your money to one of these funds? Would they produce above average returns given the apparent strong prospects for the sector? Or will it all end in tears?

Once again we have to challenge the conventional thinking of so much of the investment community. There will be winners and losers in any market, irrespective of whether it is high growth, mature or even in decline; the trick is to spot who will win and who will lose, before they do one or the other. There is an added problem in high growth markets because for a while some of the losers can look like winners as they ride the temporary and highly precarious advantage high growth sectors can give them.

The difference will be comparative Competitive Strength. Those companies with high Competitive Strength conditions, Excellence or above, or who take advantage of the high growth sector to achieve this, will be the winners. Those who do not will lose and so will those who invest in them.

Tom Stevenson gives an example in his article.

Shares in Renewable Energy Corporation, the world’s biggest producer of the polysilicon used in solar panels, dropped 23% in one day when it warned of delays and cost overruns at a new facility it is building in the US.

If a company does not even have the capability to bring on new capacity to serve a high growth market on time and on budget then it is not demonstrating a level of Competitive Strength that would indicate it is likely to be one of the winners. The market only corrected the share price to take account of this after the bad news appeared.

Applying the Competitive Strength Report process to this company would have indicated the weaknesses that were likely to lead to failures of performance of this kind. So before considering investing in this sector ask the fund manager if they have assessed the Competitive Strength of the companies whose shares form their fund’s portfolio. If they have not and/or don’t know what you are talking about, avoid.

You can find out more about the Competitive Strength Report (CSR) and Process and how this can give you different insights into how to assess company performance by visiting our website. The CSR is the only completely independent organisational self assessment tool that rapidly provides a simple and clear assessment of Competitive Strength compared to the best in the world. Please have a look at the Competitive Strength Report website or contact us via the ChangeWORLD website It may change much of your thinking about your investments.