06/08/2010 05:12 am ET Updated May 25, 2011

Green Is Longer Than Black

The investing world sees signs of spring -- or at least of new life -- in the economy. Business spending is up; employment is up. Energy prices are stirring in response to expectations of further recovery in the economy, which would mean more demand for energy.

Some of my investing friends note that this seems to be better for stock of conventional "black" energy companies (oil, gas, and coal), than for alternative "green" energy companies (solar, wind, geothermal, bio-fuel, etc.). I get reports with titles like "It Isn't Easy Being Green," seeming to chide supporters of green energy for the less than stellar short term performance of their favorite stocks.

I think the difference can be attributed to the different time frames for the typical investor in green versus black energy stocks. This is not a question of "who is right?" but of "when is right?"

The typical black energy investor is, well, the typical investor. Success is measured by return in the portfolio this calendar year. So, where will the stocks be on December 31, 2010? Almost all Wall Street analysis is based on this time frame.

For that time frame, black energy looks awfully good right now. Demand is expected to rise over the next few months as more people start to believe in overall economic recovery and therefore start to use more energy. Supply will be relatively fixed: coal, oil, and gas are very mature industires and production cannot change very quickly. Good old Adam Smith tells us that with supply fixed and demand increasing, the price will go up. With supply fixed, therefore with cost fixed, this means that profitability will go up. The only uncertainty is how fast the recovery will take hold.

But what of the dark clouds on the investment horizon for black energy: decreasing world supply (Peak Oil, remember?), higher prices choking demand, and competition from other sources? These threats are real, but they are beyond the time horizon of black energy investors. It's not that they don't know. It's that they don't have to care -- not for a while.

The typical green energy investor is looking at what will happen by 2015 to 2020, as opposed to year-end 2010. To this investor, it is a given that the price of oil will rise to over $150/bbl, even over $200/bbl, on a sustained basis. This belief is already baked into the price green investors are willing to pay.

Black energy fans sniff at the low single digit percentage that green energy commands of today's total energy market. But to green energy investors, it is a positive, meaning decades of unlimited growth headroom. The expectation for much higher growth is also "priced in" to green energy stocks.

It is interesting to note that green energy stocks took a deep dive before the overall stock market collapse of 2008, while black energy stocks largely followed the market down. I think green energy investors were more sensitive to the drop in energy demand from the ensuing recession -- this delayed the time at which their more expensive energy sources would compete with black energy on a straight cost basis, and thus pushed their payback farther into the future. Black energy investors, by contrast, were more affected by actual drop in energy consumption, which occurred later.

On the other side of the 2008 stock market disaster, green energy stocks recovered earlier, as green investors decided that even if the fiscal panic was bad, the long term effect on energy demand would not be as bad. Green energy stocks rallied a little over a year ago. Black energy stocks are rallying now.

So who is right? It depends on when you need the money from your investment. Let's say your children are now toddlers or grade-schoolers. You would probably want to put their college funds into green energy. But if your children are juniors in high school, you would be a black energy investor.

As a nation, we have children of all ages, so we need investments of all time frames. It is a good thing that they can be right at different times.