The Energy Goldilocks: As Oil Rises, Green Stocks Surge
America's Best-Performing Green Newsletter
I've mentioned before in this space that I'm not a car guy. I drive one, sure, but I view a vehicle simply as a means to get from one place to another. I think my disdain for cars comes from when I was 16. I got my license and my brother-in-law gave me his old, no-frills Subaru hatchback. My first car.
Except I couldn't afford the insurance, $1,600 for 6 months—more than I pay now for two cars annually! While working hard to cobble together the money for the insurance, one day I came home from sorting photos at Fotomat to find the car gone. My Dad had sold it for $150. He had the right to, he argued, because it sat in his driveway for months. I've been unable to get emotionally close to a car since <sniff>.
For much of my adult life, though, I didn't need a car. Until I had kids a few years ago, I lived in and around Manhattan, so I took the subway. When I worked late, my employers paid for town cars home. It's easy to be a mass transit snob that way.
It doesn't mean I don't admire cars: A winery-owning friend let me drive his $250,000 Ferrari around Tuscany one day—that was as nice as any car commercial. And through very little effort of my own, I ended up owning a near-pristine model of a relatively scarce BMW 325 ix, the first all-wheel drive sports car. But ultimately, a car is a depreciating asset and the road to wealth is best navigated by owning appreciating assets.
I may be fairly comfortable now, but I think my father's influence remains pretty strong there too. He went from having to poach wild salmon from the rivers of his native County Kerry to eat as a boy to the comfortable confines of Garden City, N.Y., while helping my Mom put six kids through college. And that didn't happen by plopping a big red bow on a luxury car for Christmas.
But now that my wife and I live on the coast north of Boston and have two growing girls, we're thinking about a bigger car. I don't think the decision is so interesting to justify prattling on about what we're considering, but it brings me to something that’s become a big psychological factor in our decision: gas prices.
Here in Massachusetts, where gas tends to be a penny or two above the national average, a gallon has breached the $3 mark, 16% higher than a year ago. The average price in 21 states is up over 40 cents from a year ago, according to AAA, and nationally, gas costs the most it has since October 2008.
It's no surprise, since gas is refined from oil, that its price moves with the price of oil. Oil actually has had an uneventful year, starting the year at $81 a barrel and closing recently at $84. It's easy to pass over those numbers, since it doesn't seem significant. But if you consider the fact the world has had large excess refining capacity all year and global demand had been relatively tepid thanks to the lingering effects of the recession, the fact oil didn't fall in 2010 is pretty remarkable.
There are three reasons I see for this: One is the fact institutional investors are returning to commodities as an investment, boosting prices like we saw in 2007.
The second is that it simply costs a lot more to produce oil now: The Saudis have said they see $75 as a fair price for oil—a decade ago they said the same about $28—and even at $75, many OPEC members including Venezuela and Iran, are believed to be pumping oil below their cost of production. And, as I have mentioned in the past, all the large, easy-to-tap oilfields are past their peak, meaning more expensive oil sands and deepwater oil need to be produced.
The third reason: The weakening dollar. A weaker dollar has always brought higher oil and gas prices. There are a few reasons for this, but one of the big ones is pretty basic: Oil is priced globally in U.S. dollars. The weaker the dollar, the more foreign producers need to sell oil at to stay level in their own currencies.
Thanks to those reasons and the fact as the economy strengthens worldwide oil demand is returning in force, I see oil prices rising significantly higher in 2011, cresting over $100 a barrel by springtime and bringing the even tougher sight of $4 a gallon gas by Independence Day.
I'm not unique in predicting this. But it sure makes our decision to buy a bigger car harder. Maybe we'll wait and buy one of the 85 new electric and hybrid car models automakers are due to roll out in coming years.
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There's a smart way to play the rising price of oil, and it's one that returns us to the idea of creating wealth through appreciating assets: Green stocks.
Higher oil prices get people antsy and anxious for alternatives. This sends them looking at electric cars and hybrids.
It gets corporations serious about natural gas-powered fleets, trading up to next generation batteries and buying high-tech fuel cells for remote power needs.
It gets local governments and utilities moving on energy efficiency programs and incentives for energy sipping LED lighting.
It gets national governments pushing for wind farms and solar installations.
And it has a clear connection to hedge fund and mutual fund investing dollars pouring into alternative energy stocks.
Of course, runaway oil prices can stifle economic recovery, sowing the seeds of their own price decline, but I think the dynamics of the world economy in 2011 have set the stage for, to borrow a phrase, a Goldilocks rally. That's to say not too soft, not too firm—just right.
In the Goldilocks rally, the weakening dollar and strengthening global economy force oil prices higher, but fears of instability in the euro zone send enough investors fleeing to the safer haven of the U.S. markets to keep the greenback from falling sharply, damping any threat of an oil price “superspike” while rallying stocks, especially Green stocks.
The last time oil moved significantly higher, in 2007, we saw triple-digit returns in solar stocks. Even this autumn, when oil prices moved from $71 in August to $84, we saw a firm rally in Green stocks.
Subscribers of the Cabot Green Investor, of which I am the editor, enjoyed a 100% rally in Polypore (PPO), a maker of sophisticated membranes for next generation batteries, a 68% surge in Amtech Systems (ASYS), which makes equipment for solar manufacturers, a 30% rally in natural foods company Hain Celestial (HAIN), a 25% rally in environmental remediation firm Clean Harbors (CLH) and six other winning stocks in the portfolio. In fact for 2010 (as of writing), the Green portfolio was up 26% in 2010! Compare that to the S&P 500, which rose 9% this year, the Nasdaq Composite gain of 15% and the WilderHill Clean Energy Index, which fell 7%.
We also bested every single Green and related socially responsible mutual fund, which on average lost money for their investors in 2010. Consider that over the past three years, the Cabot Green Investor portfolio has earned money for subscribers while the broad stock market, alternative energy exchange-traded funds and mutual funds have all lost money—in some cases a great deal.
Our secret: A superior knowledge of the industries we cover, a sense for where the market is headed confirmed by informed market watching, and timely advice to subscribers on when to sell to lock in profits and minimize losses.
As I said earlier, the best path to wealth is to deal with appreciating assets. If you want to make money on the coming oil price surge and the renewed interest in alternative energy stocks, then I invite you to subscribe to the best-performing Green stock newsletter in the nation: Cabot Green Investor.
As I told subscribers in a recent issue, Green looks like it is just in the early stages of a significant rally. You probably won't go wrong with one of the stocks I mentioned above, but there are other emerging technologies and stocks we expect to rally more dramatically. And besides, a subscription is far cheaper than a Lexus. Order Cabot Green Investor today!
All the best,
For Cabot Green Investor