It takes a lot to get me excited about new technologies.
Partly that’s because of my training in economic history. For every revolutionary invention that works, there are hundreds that don’t. Flying machines are a good case in point…
But it’s also because in today’s bet-it-all stock market environment, it’s too easy to get sucked into story stocks that have nothing behind them but hype.
That natural skepticism gives me the ability to spot the real winners at the right time.
For example, early last year I identified an opportunity in the semiconductor sector for my Alpha Stock Alert.
A small article in an obscure technology journal caught my attention. It identified big consumers that were switching to this company’s product, for seemingly mundane reasons.
Some told me I was crazy to pick such a “dog” stock. Since then Alpha Stock Alert subscribers have taken hefty profits several times on the pick, which is still going strong.
That technology had reached a tipping point … one that took it from potential to actuality. In the language of economic historians, it went from merely having been “invented” to being “innovated” into profitable real-world uses.
Now I’m convinced that the time is come to jump in with both feet on another set of technologies that have been around for a long time … but whose time in the sun has finally come.
Solar: A Matter of Time
For most of human history, the sun has provided our energy … at least, indirectly. Now it’s cheaper to go straight to the source.
All fossil fuels represent stored solar energy. Ancient plants used sunlight to photosynthesize. Those plants or the animals that ate them died and were buried under the earth’s surface, where immense pressure over millions of years converted them into oil or coal.
Converting this stored solar energy back into a usable form is expensive, wasteful and damaging to the planet. It requires billions of dollars to extract, process and convert into usable energy … and to mitigate its damage to the environment.
Human beings have known how to copy plants’ ability to turn sunlight into energy for more than a century. The first photovoltaic (PV) cell was invented by Charles Fritts in 1883. But three things have prevented the widespread adoption of solar energy:
- First, it’s taken more than a century to make PV cells efficient and cheap enough for practical use. Fritts’ original cell only converted 1% of potential solar energy into electricity. It incorporated a thin film of gold, which made its electricity prohibitively expensive. Today, advances in efficiency and lower production costs mean the best commercially available solar cells achieve efficiencies of 20 to 22%. Techniques now under development have reached 40% efficiency.
- Second, the direct cost of generating energy from fossil fuels has still been cheaper. As long as the cost of a megawatt-hour of electricity from coal or gas was less than that of solar — ignoring, of course, the broader environmental costs — there was no incentive to make the switch.
- Third, once the per-megawatt hour cost of solar energy began to approach that of fossil fuel, vested interests convinced politicians to penalize solar users. Energy producers and electricity utilities argued that it was “unfair” for individual homeowners to generate their own solar electricity since the utilities had already spent money to connect their homes to the grid.
Solar’s Time to Shine
The average cost of solar energy in North America fell below that of coal in 2013. It fell below natural gas in 2015:
At the same time, politicians and regulators have reluctantly accepted that the external costs of fossil fuel-generated electricity have to be included in the calculation. When the costs of pollution, climate change and human health are factored in, the long-term cost of coal and nuclear power vastly exceeds that of solar.
It will become cheaper than utility-scale natural gas later in this decade:
Ride the Sunbeams to Profits
The history of solar power illustrates a critical factor that many investors overlook. Technologies aren’t neutral. Whether they are deployed or not depends as much on politics and power as it does on science and rationality.
That’s why I have become increasingly bullish on the solar power sector. Although the current crop of politicians in Washington has tried to turn back the clock in favor of coal, the raw economics mean that simply isn’t going to happen.
Instead, I predict that our political class is going to accept the fact that solar energy is both cheaper to produce and better for everyone. The fabricated obstacles that have stood in its way are likely to subside over the next decade.
We humans have finally caught up with the potential of our own inventions. To take advantage of that, I recommend the exchange-traded fund (ETF) Invesco Solar ETF (NYSE: TAN). Its holdings cover the range of subsectors involved in solar production, including manufacturing, storage and distribution.
After trading sideways along with the broader market for most of the last three years, TAN has broken out this year. It’s up over 65% year to date.
So put on your sunglasses, open the blinds and let the profits shine in.
Kind regards,
Editor, The Bauman Letter