by David Fessler, Investment U’s Energy and Infrastructure Expert
Friday, September 24, 2010: Issue #1352
I looked at the statistics and thought, “Uh-oh.”
After all, the messy dotcom boom-to-bust of 10 years ago is a stark reminder of what can happen when too much money chases after an industry that can’t keep up.
Today, investment capital money is consistently flowing to another hot area. In fact, companies within this segment of the energy sector received more than half of all venture capital money in 2009.
I’m talking about “Smart Grid” companies – that is, those helping to beef up the U.S. power grid infrastructure.
So is the amount of investment a cause for concern here? Nope. Far from it.
I’ve written about the Smart Grid topic several times in previous Investment U columns, but you might not hear too much about it in the mainstream news. After all, it’s not as flashy or exciting as the dotcom era was.
Nevertheless, there are some big myths when it comes to investing in the Smart Grid area. Let me bust them and show you where to invest instead as America tries to solve its power problems…
One Squirrel Shuts Down an Entire Neighborhood
The other day, I lost power at my house, just as I was in the middle of some work.
In the past, I’d have probably cursed a lot. But a few years ago, I installed an uninterruptible power supply in my office. So when the power goes out, it keeps my computer on long enough for me to save my work.
But here’s the remarkable thing: When I called the power company, it was completely unaware of the problem. This highlights a major problem in our nation’s power distribution network – a lack of adequate technology and awareness.
But the Smart Grid is going to fix all that, right?
The answer is “yes”… eventually. And when it’s fully implemented, the Smart Grid will make problems like this a thing of the past. However, getting from where we are today to keeping the lights on 100% of the time will take a decade or so.
And such a massive infrastructure project opens up some huge opportunities for investors.
But beware: As they do with most new technologies, the media and some analysts have zeroed in on the wrong areas of the Smart Grid to invest in. That’s because they don’t understand the problems that really need solving.
Even worse, they’re clueless as to who’s doing what. Making the power grid “smart” is a very complex problem. And understanding it can be daunting.
That leaves most investors with money parked in companies that are going nowhere fast. So I’m going to dispel the three biggest myths about where to invest in the Smart Grid.
Smart Grid Myth #1: You Should Invest in Smart Meter Companies
President Obama has called for the installation of 40 million smart meters in American homes. And it’s triggered a big boost for smart meter companies over the past two years.
Nothing could be further from the truth.
Operational quirks aside, smart meter companies haven’t exactly set the investment world on fire.
For example, if you plunked money down on shares of Itron two years ago, you’re down over 41%. And GE has tumbled by 38%.
Problem: A smart meter costs anywhere from $100 to $250. The average regulated utility would need a rate increase in order to justify its cost, unless it got some of the government’s stimulus money to pay for it. Either way, you’re the one who’s ultimately going to pay for the meter.
Problem: There’s also a privacy issue. Many folks just want the power company to provide power without them knowing what the power is for and making decisions for you.
For example, if your computer’s screen saver kicks in while you’re in the shower, the power company could shut down your computer in the interests of “smart power.” And if you want an irate customer, just turn off his air conditioning when he needs it most.
In addition, a few smart meter projects haven’t worked out as planned. Erratic software and hardware has caused more than a few customers to demand that their smart meters be removed.
Tip: Stay away from smart meter companies. Smart meters are destined to become a commodity item and the companies that make them will make little profit over the long haul.
Smart Grid Myth #2: You Should Invest in Long-Distance Transmission Companies
There’s no doubt that America’s power transmission system needs more capacity. With big commercial wind farms planned for the Midwest, we’ll need additional high-voltage lines to get the power to densely populated areas on the east and west coasts.
Problem: However, waiting for these companies to make money will be like watching a Bonsai tree. You won’t see much happen for a long time. The reason?
Regulatory approvals. Unlike gas and oil transmission lines, whose permits are granted at the federal level, electrical transmission lines require hundreds of local approvals.
Dozens of zoning boards, town governments and planning commissions drag the average transmission approval process out to three to five years. Who wants to wait that long to see a return on their investment?
Tip: Toss transmission companies like ITC Holdings Corp. (NYSE: ITC) into the trashcan. Its shares have appreciated a paltry 4.8% over the past two years.
Smart Grid Myth #3: You Should Invest in “Smart” Appliance Companies
These days, there are tons of companies making smart, energy-saving appliances. While many work efficiently, it’s too early in the game to invest your money in them.
You see, competing standards for home networking like Zigbee, Insteon, Zwave and WiFi are all supposed to play together. And smart meters need to be able to talk to all of them. It’s a real can of worms.
Tip: Buying the companies that make smart appliances is a waste of money right now. Take Whirlpool Corporation (NYSE: WHR) for example, which makes many of them. Its shares are down nearly 14% in the last two years.
So where should you invest your money with regard to the Smart Grid and the companies involved with upgrading it?
The Only Place to Invest in the Smart Grid
Under the current system, power moves in one direction: from the generator to your house.
But that’s going to change. Power is going to start moving in the other direction. And home wind generators, rooftop solar panels and plugged-in electric vehicles all represent power generation sources.
However, managing them is the biggest problem that power companies are going to have to solve as part of the Smart Grid implementation. And that means the power distribution network will see the biggest change.
Power companies are just starting to realize it. And more importantly, they’re starting to invest in it. Bigtime. They’ll be pumping in hundreds of billions of dollars over the next decade.
Companies like Cisco Systems, Inc. (Nasdaq: CSCO) and a few others will play a role in this area.
But I’ve found one company that has a five-year lead over its competitors. In 2008, it grew over 25%. And last year, it notched up 30% growth. What’s more, when I spoke to the COO of its Smart Grid operations, he saw no end in sight to that growth picture.
Subscribers to my Peak Energy Strategist research service have just received a detailed report on it, plus another fast-growing company that we just added to the Peak Energy Portfolio. You can get this report, learn more about these companies and get the full story on my energy and infrastructure-based Peak Energy Strategist right here.