PowerShares WilderHill Clean Energy (ETF) (PBW): This ETF Is a Case Study in “De-worsification”

Is PBW worth consideration today?

After dropping from over $28 per share to $5 per share with the long-term investment thesis that clean energy will continue to grow still intact, a contrarian investor might consider buying PBW today. While there is certainly tremendous upside potential, caution is warranted. Many of the companies within the index have either never been profitable or are struggling to resume profitability. For example, Suntech plunged by 24% in a single day last week on fears that the company will be forced into bankruptcy; this company still represents almost 2% of the ETF, and it is unfortunately not the only PBW holding in this position. Additionally, the competitive and budgetary pressures that popped the clean energy bubble still remain, so even the companies on more solid financial footing will not have an easy climb back to profitability.

It pays to be selective

Rather than rolling the dice on a bet that clean energy stocks are coming back as a group, it is more prudent to take a look at PBW’s current holdings for ideas for a profitable investment. A number of solid, profitable companies with big market opportunities remain in the index. For example, despite Ameresco’s recent struggles converting backlog into revenue, the company remains solidly profitable and occupies an enviable position of managing projects where the customer and company’s interests are closely aligned. Any sign that potential clients are finally willing to let Ameresco save them money over the long term by helping improve energy efficiency (as measured by conversion of backlog into active projects) could provide 100% upside just to get back to the valuation assumptions behind this year’s 52-week high. This won’t happen overnight, but a patient investor stands to benefit significantly based on current prices once the company demonstrates that projects are underway.

A less risky investment in clean energy is transmission company ITC Holdings Corp. (NYSE:ITC) . ITC is often overlooked because it operates in the “boring” world of electricity transmission, but connecting clean energy projects to the grid while enjoying favorable government regulation has proven to be a profitable business for ITC and its investors, as illustrated by the chart below:

ITC Total Return Price data by YCharts

All indications point to ITC being able to continue its recent growth for the foreseeable future. As a result, the company represents a relatively low-risk way to profit from the growth in clean energy without the drag of the higher-risk holdings in PBW.

The article This ETF Is a Case Study in “De-worsification” originally appeared on Fool.com and is written by Brian Shaw.

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