Green Investments: Lots of Alternatives, with Big Names for Safety

by: Edward Silver

The financial fiasco has sidelined climate change and energy as hot topics, but the move to sustainability may do far more to shape our lives. Over time, trillions of dollars are likely to be channeled into solutions. For investors, clean and green offer a triple bottom line: Heal the planet, renew the economy and turn a profit.

Green investing is also a terrific way to damage your own bottom line if you make unwise, or unlucky, decisions. In emerging fields with great futures but skimpy track records, shares tend to climb high on faith and fall hard on despair. Crowds of contenders are brutally winnowed, leaving one or two standing and the rest forgotten.

In the aggregate, though, the green theme is widely expected to see vigorous growth.

"Sustainability has multiple drivers. Costs are coming down, and carbon is going to be regulated," said Jack Robinson, founder and president of Winslow Management, which runs eco-friendly mutual funds.

The American consumer wants to be involved in it, and big companies are increasingly interested because they desperately need growth themselves.

Indeed, the green zone has no easily definable borders. Weatherization specialist Apogee Inc. (NASDAQ:APOG) resides there; so does Prius maker Toyota Motor Corp. (NYSE:TM). The purest plays, however, are the companies that produce energy without spewing carbon or burning finite resources, names like First Solar Inc. (NASDAQ:FSLR) and Vestas Wind Systems (OTCPK:VWDRY). Wind and solar satisfy only a minuscule portion of the nation's vast appetite for electricity. But their output swelled well over 30% last year, according to their trade associations.

Nevertheless, in the second half of 2008, renewable energy shares took a more dramatic dive than Michael Phelps ever did, far outdoing even the S&P 500 banking index on the downside.The meltdown that sparked a recession and sent cash fleeing the stock market put a special curse on the sector. Wind and solar projects, with their hefty upfront costs, were frozen out by the credit freeze after a strong start to the year.

Prices at the filling station have become another dead weight. Investors typically peg renewables' value to the going rates of their fossil fuel rivals: oil, coal and natural gas. Although the downturn hasn't curbed consumption all that much, prices have collapsed, restoring conventional energy's status as the low-cost alternative.

As we enter 2009, pessimism still reigns, despite the recent bump in those capricious solar shares. But the incoming administration's agenda, and a potential rebound in fossil energy, could light a fire under the sector.

To bend one of Obama's slogans, climate change is change he can believe in. The president-elect has packed his Cabinet and advisory ranks with clean energy fans. Further, he intends to seek legislation that will favor green business and, in his words, "make dirty energy expensive." He's no friend of coal plants and could heap charges on the privilege of emitting carbon, for instance. If made law, policies like these can eventually alter the cost equation.

Conservation and renewables will get another push in the form of public works projects built into Obama's stimulus mega-package. China, a prolific polluter as well as a center for green tech, is doing the same thing on an even larger scale relative to GDP. If these investments show results, then everything in energy – conventional and otherwise – heats up.

What could add fuel to the fire is a surprise supply crunch. Just as the oil bubble put OPEC in high gear and spurred arduous digging in remote places, the slump is taking crude off the market and shutting down projects, in the Canadian tar sands, for instance. If demand rebounds, the spigot may be slow to reopen. The result: Prices climb higher, faster.

There's no telling when green stocks will be recharged, but fewer solar companies will be around to enjoy it. In 2005 and '06, they went public in droves, flashing an early warning to investors who remember the dot-com bust. Before going into free fall in '08, the shares had reached dizzying heights. Now some solar names look cheap relative to initial '09 forecasts. But forecasts are being cut and cash on the balance sheet can disappear.

"Companies that aren't fully capitalized will probably have to shut their doors in late 2009, and a handful of players will come out much stronger," said analyst Sanjay Shrestha, who covers renewable energy for Lazard Capital Markets.

Shrestha and Robinson both advise investing in companies with a clear competitive edge. SunPower Corp's (SPWRA) products are said to be the most efficient for turning light into electricity. Suntech Power Holdings (NYSE:STP), based in China, claims leading market share among standalone providers. First Solar is the industry's best hope for bringing costs down to fossil fuel levels, and Energy Conversion Devices Inc. (NASDAQ:ENER) boasts strong margins for its flexible, lightweight modules. To buy the sector, look into the Claymore/MAC Global Solar Energy exchange-traded fund (NYSEARCA:TAN).

Building wind turbines has proved to be a rich business for Denmark 's Vestas and Spain's Gamesa (OTCPK:GCTAF). The U.S., on the other hand, has no major pure plays in wind, though it's seen as the industry's next great staging ground. General Electric Co.'s (NYSE:GE) turbine unit is the flagship of its array of clean-tech businesses it calls ecomagination. Those ventures brought in an estimated $17 billion in 2008.

Shares of parts makers Kaydon Corp. (NYSE:KDN) and Zoltek Cos. (NASDAQ:ZOLT) may have a second wind when the industry turns around. To get in on the worldwide action, try the First Trust Global Wind Energy ETF (NYSEARCA:FAN). To purchase a piece of the terra firma where wind farms may sink roots, look into real estate investment trusts in the Plains states.

To bring renewable power from the open spaces to the cities, new long-distance lines are needed. Transmission is costly and doesn't do much for the landscape, so such projects often rouse protest. Consequently, the network isn't keeping up as utilities churn out more power. Experts call it congested, creaky and unprepared for long hauls.

A name that comes up often as key to a future buildout is Quanta Services Inc. (NYSE:PWR), which designs and installs utility lines. Valmont Industries (VBI) sells building blocks such as poles and towers, and General Cable (NYSE:BGC) provides the wires to carry the current. Their products have applications far beyond energy, though, and demand may rise during an infrastructure buildout. Kudos to the guys at Alt Energy Stocks for their work in this and other areas of clean tech.

All three stocks have been zapped, notwithstanding the firms' respectable fall-quarter results. General Cable has been especially volatile, ranging from $75 to under $7 in 2008.

According to the Environmental Protection Agency, California's drought won't seem so remarkable in five years. Climate change and aging facilities promise to spread water shortages through most of the nation, the agency says. In many places around the world, potable H2O remains a rare commodity.

U.S. spending on water, now stagnant, may flow faster under Obama. Tetra Tech Inc. (NASDAQ:TTEK), a water engineering firm, does almost half its business with the government, which explains its reliable revenue streams. Desalination is a theme that's attracted giant GE and Dow Chemical (NYSE:DOW). Some believe, however, that little Energy Recovery Inc. (NASDAQ:ERII) has the know-how to fix desalination's chief drawback: its thirst for electricity. Nalco Holding (NYSE:NLC) conserves water by purifying it for industrial use — recycling it, essentially.

For the fund-minded, Invesco PowerShares has two. Its Water Resources ETF (NASDAQ:PHO) is geared to the U.S., and the smaller Global Water Portfolio (NASDAQ:PIO) sets its sights overseas.

Johnson Controls Inc. (NYSE:JCI), founded in 1885, operates in some very modern niches. Its systems manage the way energy is meted out in buildings, which plays into conservation consciousness. It also makes lithium-ion batteries for hybrid vehicles — which leads you to wonder what the unfolding rescue of the automakers means for the green investor.

There are signs that Obama wants to see the automakers remodeled into standard - bearers of sustainability. During the campaign, he called for stricter tailpipe emission rules, more vehicles that run on either ethanol or gasoline, and tax breaks to drive purchases of hybrids.

Does that mean the suffering ethanol sector will flourish again? Will research subsidies bring fuel made from plant waste to market? Can you pick a winner among the pack of brainy battery start-ups? Until the situation gets a good deal clearer, these are areas for lovers of longshots. More broadly, though, if the car wreck leads to a green overhaul, new markets will open up to eco-oriented investors.

No one can map out where next-generation vehicles are going, and that's just the start of the riddles green investors face. Plenty of provocative but unproven ideas are out there. Equipment to bury coal emissions may one day be a big business, for instance, but that day is a long ways off. Money thrown at a hot concept may go up in smoke, so caution is advised.

Even established fields are full of unknowns. Outside forces like commodity prices and public policy can lead stocks around by the nose. Behind the scenes, technologies vie for advantage. In solar, for instance, the dominant silicon-based formula is challenged by "thin film" and solar thermal, which relies on steam. Add in the inevitable missteps of young firms and the way stock speculators pile onto trends and, well, buckle your seatbelts. Don't forget, though, that volatility can bestow profits, too.

But if you don't like roller coasters, consider owning a piece of a greening giant.

That's where GE, Johnson Controls and other companies in transition fit in. First Solar may flourish, but so will Japan's Sharp (OTCPK:SHCAY), the world's No. 1 solar provider. IBM Corp. (NYSE:IBM) consults on smartening up the electric grid, and chip-fab titan Applied Materials Inc. (NASDAQ:AMAT) now sells solar manufacturing gear. Even Google Inc. (NASDAQ:GOOG), which makes its living in cyberspace, views renewable energy as a potential growth market.

Doug Sandler, chief equity officer for Riverfront Investment Group, is waiting for household-name companies to sort the market out. He expects fledglings to give way to veterans with cash stockpiles, reliable manufacturing and global scale. "Some of these smaller companies will plow the field," he said, "but when it comes time to harvest, the big companies will be the beneficiaries."

When he's not winning Nobels and Oscars, green hero Al Gore is a prominent investor. Strategists at his London-based firm, Generation Investment Management, largely follow that big-tent logic, buying stakes in proven companies that are moving in the right direction.

Gradually, the thinking goes, their sustainable ventures will enjoy much healthier growth than the old operations, changing the nature of the company. That strategy requires patience, however. As we learned in 2008, it takes time for brown to turn to green.