Investing in Cleantech Companies

If you missed the boom in green energy and environment stocks back in 2007, you're probably lucky. "Cleantech" shares soared much higher than the broader market that year, which made it all the more harrowing for investors when the stocks crashed to earth in 2008. As measured by the WilderHill New Energy Global Innovation Index, cleantech dropped 63%, compared with a 44% decline for the benchmark MSCI World Index. A basket of solar companies, which investors bid up to dot-com-like multiples, plunged 76%. "These markets dropped off a cliff starting last January," says Michael Herbst, mutual fund analyst at Morningstar (MORN). "It's been ugly."

All things being equal, the green sector should recover once the global economy rallies and energy prices start to rise again. "Cleantech will come back with, not ahead of, the broader market," says Steven Milunovich, a Merrill Lynch (MER) strategist who covers this area. He and other analysts also believe the sector could regain its luster much sooner if President-elect Barack Obama pushes through a huge federal green initiative in his first few months. Any payoff for near-term bets investors place on cleantech stocks will depend greatly on the scale of his efforts.