A couple of recent energy reports claimed that the global energy demand will increase between 6%-8% annually for the next 10 years. With the rising environmental concerns and depleting hydrocarbon reserves, however, the demand for clean energy is growing rapidly. According to a report by the International Energy Agency, renewable energy will become the world’s second largest source of energy by 2016, after coal.
This leads me to believe that the time of green energy is finally here, and companies that are directly or indirectly related to renewable energy could deliver massive returns over the next five years. Of course, not all companies can be the “next big thing.” Here are a few companies that offer more growth potential.
Electric vehicles
With its recent technological achievements, I don’t think that Tesla Motors Inc (NASDAQ:TSLA) needs an introduction to the investing community. Its revolutionary supercharger technology has enabled electric vehicles to cover practical distances (around 200 miles) on a single charge. This has directly stacked Tesla Motors Inc (NASDAQ:TSLA) up with its petrol and diesel engine rivals.
Tesla Motors Inc (NASDAQ:TSLA) recently unveiled its 90-second charging technology, wherein customers can get their batteries recharged for $60-$80 within a minute and a half. This is faster than any gasoline filling station, and beats the basic premise that electric cars take a long time to recharge. Its regular battery recharge is done in 30 minutes, which can be done for free at any of its supercharger stations.
Since its electric cars don’t have combustion engines, Tesla Motors Inc (NASDAQ:TSLA)’s offerings are free from engine-related problems such as overheating or carbon accumulation. Apart from offering low-cost travel, these technical advantages allow hassle-free and low-cost maintenance for Tesla Motors Inc (NASDAQ:TSLA)’s vehicles. That’s certainly the next big thing, which I have covered since last year.
But with a forward price-to-earnings ratio of 20 times, its shares appear to be greatly overvalued and it is debatable whether this the right entry point or not. In my opinion, instead of following the rules of conventional investing, investors should gauge the depth of Tesla Motors Inc (NASDAQ:TSLA)’s speculative growth potential and proceed likewise.
Solar panels
Out of the companies I’m looking at, First Solar, Inc. (NASDAQ:FSLR) appears to be the most undervalued play with a forward price-to-earnings ratio of 13.5 times. Its shares have appreciated by nearly 185% over the last year, and yet it still seems to offer a lot of upside potential.
First Solar, Inc. (NASDAQ:FSLR) primarily manufactures solar panels which are sold for both industrial and domestic purposes. The company currently dominates the global solar industry with just 7% market share. The reason behind its small market share is the abundance of small companies in the industry. These smaller companies also offer solar panels that convert solar energy into electricity just fine.
But First Solar, Inc. (NASDAQ:FSLR) is at an advantage due to its large-scale production facilities and manufacturing processes which allow for significant cost reductions and competitive pricing. I don’t think that many smaller companies would be able to stay afloat in the hyper-competitive industry of solar. This leads me to believe that there could be plenty of strategic merger and acquisition activity amongst these small solar manufacturers.
In order to boost its global market share and extend its lead, First Solar, Inc. (NASDAQ:FSLR) is aiming for a 25% market share in India over the next 3 years. On the growth front, First Solar, Inc. (NASDAQ:FSLR) continues to benefit from its agreement with SolarCity Corp (NASDAQ:SCTY).
Solar energy
SolarCity Corp (NASDAQ:SCTY) is one of the leading “green companies” that leases solar power systems for domestic consumption. The company has tied up with First Solar, Inc. (NASDAQ:FSLR) for solar panels, so both the companies stand to benefit with every sale by SolarCity. As a result of this strategic venture, SolarCity has quickly become the market leader in the residential solar leasing business with a market share of 10.2% (calculated by new systems installed in 2012).
On the growth front, I believe that there’s still a lot to be achieved. As of now, SolarCity’s modules need charging during daytime and discharge electricity during night. As a result, SolarCity has temporarily tied up with electric utilities to provide electricity to its customers during daytime. This has been a major deterrent for the adoption of its solar modules.
In 2013, however, SolarCity is planning to provide uninterrupted solar electricity to its customers. The company recently announced that it will add 250 MW of electric capacity in 2013, eventually eliminating the role of electric utilities. As of now, SolarCity is operating with a total capacity around 150 MW, and an addition of 100 MW will play a vital role in increasing its consumer base.
Final words
In retrospect, all three companies have enjoyed a meteoric growth over the last couple of years. Shares of Tesla Motors, First Solar and SolarCity have more than tripled over the last year, which have taken Tesla and SolarCity to ridiculously high valuations.
It should also be noted that the industries of domestic solar panels and electric cars are largely unregulated, however. Any future policy changes or government intervention could potentially destroy their growth prospects. Another risk comes from market speculation and hype, which makes these stocks more volatile (high beta).
Stocks having high beta values suggests that they will be more volatile as compared to benchmark indices. Aside from holding the above-mentioned stocks, I believe that investors should also consider investing in low beta stocks to lower their overall risk exposure.
The article Buy These Green Stocks for High Returns originally appeared on Fool.com.
Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors . The Motley Fool owns shares of Tesla Motors. Piyush is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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