Can Investors Profit from President Obama's New Energy Policy?
Apr 4th 2011 10:00AM
Updated Apr 5th 2011 5:23AM
There's no telling how much profit will actually be generated in each of these industries, but it's worth looking at a few exchange-trade funds that act as proxies for natural gas and alternative energy to see if there are ways individual investors can capitalize on these new policies.
Since the president touted a federal tax credit for the purchase of electric vehicles, as wells as a directive for federal agencies to purchase alternative fuel vehicles, companies that manufacture hybrid or electric cars such as General Motors, (GM) with its Chevy Volt and Nissan (NSANY) with its Leaf, might be expected to post more sales. But since these global companies produce millions of vehicles, it will take both time and a major change in buying trends to boost the relatively modest sales numbers of electric and hybrid models to the point that they make a big impact on manufacturers' bottom lines.
Compared to the relatively diffuse impact the announced policies could have on auto sales, natural gas, solar and wind are "pure plays" on the growing use of natural gas and a federal emphasis on encouraging alternative energy.
Charting the Alternatives
Rather than attempt to review the dozens of publicly traded natural gas, wind and solar companies for trends, let's refer to exchange-traded funds that act as proxies for each industry: the U.S. Natural Gas Fund, (UNG); the Global Clean Energy Index Fund (ICLN); the Global Solar Energy Index (TAN), and the Global Wind Energy Fund (FAN).
Here are the charts for ICLN, UNG, and the S&P 500, which we can use as a baseline for comparison.
Despite the obvious promise of natural gas and alternative energy, both ICLN and UNG have dramatically underperformed compared to the S&P 500.
ICLN tanked along with the rest of the market during the global financial crisis, recovered strongly to the $25 level in spring of 2009, and has since drifted down to a trading range below $20. A recent uptick brought it to $18.77, a far cry from its 2008 levels around $50.
The irony about natural gas is that its new-found abundance due to technological advances has caused its price to plummet. This is reflected in the chart of UNG, which has cratered from $80 in 2008 to just above $11. In terms of relative performance, the broad-based S&P 500 has outperformed both natural gas and clean energy, as it has more than doubled off its lows and reached price levels last seen in 2008.
Much Promise, Little Profit -- So Far ...
Next, let's compare the narrower ETFs for solar (TAN) and wind energy (FAN) and the natural gas fund UNG against the S&P 500 on a nine-month chart, which captures the relative price movement of each since last summer's swoon and subsequent liftoff in September.
What really pops out of this comparative chart is the solar ETF's volatility. It has outperformed the SPX and then crashed back down, all in a few months. Wind energy has underperformed the SPX, but recently closed the gap, logging a 10% gain since last summer. But it still lags the S&P 500's nearly 20% gain over the period.
Natural gas, meanwhile, has sunk 35% since last summer, a dismal return for its investors. However, long-term investors might be willing to bet that these price levels are the bottom of the range, and buy now for the future, when natural gas might not be so cheap.
Investors in wind, solar and other clean energies will have to buckle up for the ride, for heightened volatility seems to be a salient characteristic of these sectors. Their underperformance since 2009 could be seen as either discouraging or as an opportunity to buy into future earnings at reasonable prices.
Investing in sectors which may benefit handsomely in the future from the policies of today requires patience and a strong stomach for uncertainty and volatility: There are no sure things or crystal balls when it comes to investing, only probabilities, forecasts and whatever we can glean from the charts.