The past few years have been very rewarding for investors in some renewable energy shares.
Lithium mining developer Kodal Minerals has seen its shares soar by 142% so far this year, for example. Over five years, Kodal shares have more than quadrupled.
But with so much investor focus now on renewable energy shares, have I missed the boat when it comes to adding some to my portfolio?
I think the answer is a firm ‘no’. In years to come, I expect some renewable energy shares could still do very well. At the same time, I think a lot could yet perform poorly.
That is because the industry overall continues to develop quickly. In an immature industry, the long-term economics both of the industry and of individual companies within it often remain unclear.
What will demand be? How will the competitive landscape look? What sorts of profit margins might end up becoming the industry norm?
Such questions matter as an investor because without having an answer to them, it is hard (if not impossible) to assess the outlook for a company.
If I cannot assess the outlook for specific renewable energy shares, buying them would be speculation not investment. As a long-term investor, that does not attract me.
Take as an example hydrogen energy firm Ceres Power (LSE: CWR). Its shares are close to their 12-month low, having lost over half their value in the past year. Yet they have still more than doubled in the past five years.
Revenue last year shrank by 28%. That is hardly reassuring for a company that on paper should have strong growth potential. As hydrogen energy continues to grow at speed, I would expect a company like Ceres to report growing, not shrinking, revenues.
Ceres is also hugely loss-making. Last year it spent close to £1m a week in net cash on operating activities, compared to £22.1m of revenue for the full year.
On the other hand, Ceres’ technology remains promising. It has signed agreements with industry giants including Bosch to validate its technology. If it can find the right business model to commercialise its technology, I think Ceres has the potential to profit from growth in the hydrogen energy market.
Wait and see
Until there is more evidence of such a proven business model, I have no plans to invest in Ceres. My approach matches how I feel about many renewable energy shares. It is not that I am too late to invest – but too early.
I prefer to wait until the industry economics are clearer and I can judge whether any specific company seems to have what looks like a sustainable competitive advantage.
It is easy to salivate over explosive growth stocks in an emerging industry and feel an urge to jump in. But that can be a costly mistake. Successful investing is not just about identifying winners. It also involves trying to avoid risky shares that could turn out to be losers.