We sifted through the multitude of green stocks to bring you a short list of choices that are likely to be strong candidates for a portfolio in 2009.
Companies most likely to benefit have strong cash flows and pay high dividends, with the exception of some pure play companies that are well positioned to benefit from the Recovery Plan now making its way through Congress.
Companies that are least likely to benefit are those that can't survive without credit or need to raise cash. That points to early, developmental stage companies that have yet to generate revenue or turn a profit.
In summary, this isn’t a time for speculation, but instead to focus on established leaders.
Clean Energy ETFs:
If you don't want to pick stocks but still want exposure to clean energy, ETFs are an excellent, low cost way to invest. Actively managed mutual funds have much higher fees and performed just as poorly as ETFs in the down market.
Many clean energy sectors have ETFs: solar, wind, carbon trading. If you think one sector will outperform clean energy as a whole, you can now segment your investment.
If you want to invest in clean energy as a whole, your choice is between ETFs that focus on US companies or on companies internationally. Since most of the world's established clean energy companies are outside the US, investing in US-only ETFs gives you exposure to smaller, more volatile stocks.
Domestic ETFs outperform in rising, growth-oriented market conditions (remember 2007?), while international ETFs give you broader diversification and tend to perform better in down markets. Expense ratios range from 48%-75%.
- PowerShares Clean Energy (PBW): consists of companies that trade on US exchanges, many of which could benefit from the Recovery Plan
- iShares S&P Global Clean Energy Index ETF (ICLN): international ETF.
- Van Eck Global Alternative Energy Fund (GEX): international ETF.
- PowerShares Global Clean Energy Portfolio (PBD): international ETF.
Many of the following companies have been on our annual SB20 List: The World’s Top Sustainable Stocks. Since only the very top companies are selected for the list, they are more likely to excel, giving them an edge up in this difficult economic climate. Asterisks ** indicate that a stock is on the SB20 list. I’ve also indicated when stock profiles are available in our green investing newsletter, Progressive Investor.
This could be a difficult year for solar, although the Recovery Plan could help. Companies that are highly differentiated with strong balance sheets are good buys at currently low prices, especially because solar will be a very strong play long term. Avoid higher-cost, commodity producers that operate on thin margins.
- **First Solar (FSLR): always at the top of our solar list, FSLR is the leader in thin-film solar, producing panels at half the cost of competitors.
- 5N Plus (FPLSF.PK): a major supplier to First Solar, and thus a back door play. It beat revenue projections in the midst of a tough solar space and recession. Profile: Issue 53, April 2008
- **SunPower Corp. (SPWRA): high efficiency solar (20%), vertically integrated manufacturer beat expectations handily this quarter - one of the best positioned firms in both the residential and utility solar markets, with 1 GW of utility-scale projects under negotiation. Solid balance sheet.
- **Vestas Wind Systems A/S (VWSYF.PK): based in Denmark, the world's top wind turbine manufacturer with a 23% market share and highly vertically integrated operations. Robust balance sheet and strong margins (11.1%). This stock is usually too hot to touch. See SB20 profile: Issue 46, July/August 2007.
- **Gamesa (GCTAF.PK): based in Spain, Gamesa holds a 15% market share in wind turbine manufacturing, is vertically integrated with high margins (12.5%). It is debt-heavy but has lots of cash. See SB20 profile: Issue 37, July/August 2006.
- Nordex AG (NRDXF.PK): based in Germany, manufacturers large wind turbines and has a growing presence in China. Strong balance sheet but lower margins (5%).
- First Trust Global Wind Energy ETF (FAN): gives exposure to the wind industry as a whole at low cost.
With federal tax incentives available for the first time, this could be a great year for geothermal, which has been quietly gaining ground. The Geothermal Energy Association says the Recovery Plan has sets aside about $440 million for geothermal projects, and almost 200 million acres of BLM and National Forests lands were just opened for geothermal leasing. Over 100 confirmed projects could quickly achieve 4000 MW of power in just a few years.
- **Ormat (ORA): This Israeli-American company is the world's leading geothermal company with a 40 year history. The only vertically-integrated firm in the field, it also provides recovered energy, manufacturing equipment and supplying energy worldwide. During the market crash, ORA's stock dropped half that of clean energy stocks (-45%). ORA projects 20% annual growth and pays a dividend. See SB20 profile: Issue 55, June/July 2008.
- Raser Technologies (RZ): uses a modular method to build geothermal plants, starting small and building out as needed. Raser is commissioning its first project in Utah and has enough cash to last through 2009 when they should start generating significant revenue. It's more of a gamble than ORA, but could be a great growth stock.
- **Waterfurnace Renewable Energy (WFIFF.PK): Manufacturer of geothermal heating and cooling systems, makes 40% of the systems in the U.S. 3.27% dividend. See SB20 profile: Issue 55, June/July 2008.
It could take some time for smart grid funds to flow because no established government conduit exists to route this kind of spending.
- **IBM (IBM): 16% of revenue comes from public sector consulting on information systems and green data centers, necessary to increase the intelligence of systems involved in the electric grid, data centers, water distribution and the food-supply chain. IBM has a defensive business profile for current market conditions; strong balance sheet, dividend. See SB20 profile: Issue 55, June/July 2008.
- ABB (ABB): Lays cable which increases the efficiency of power lines by 15-20%; over $600 million in sales hooking wind projects to the grid last year. Very strong balance sheet and presence in developing countries. 3.58% dividend yield.
- **Itron (ITRI): one of the top three metering firms in the world with an established history of positive cash flows.
- EnerNOC (ENOC): demand response and energy management solutions, mostly to businesses that use less than 1 MW of energy, like big box retailers and grocery stores, but also to utilities and government. Solid cash on hand.
Energy Efficient Buildings:
These companies could be among the first to benefit from the Recovery Plan.
- Owens Corning (OC): insulation.
- **Apogee Enterprises (APOG): efficient window manufacturer.
- See SB20 Profile: Issue 55: June/July 2008.
- **Baldor Electric (BEZ): efficient motors, strong company with 4.74% dividend yield. See SB20 Profile: Issue 28, June/July 2005.
Rebuild Roads/ Railroads/ Transport:
- Astec Industries (ASTE): makes energy-efficient, low emissions heavy equipment; the world leader in hot mix asphalt manufacturing equipment, which uses up to 50% reclaimed asphalt for road building. See Profile: Issue 58, November 2008.
Unlike the smart grid, the Clean Water State Revolving Fund exists to fund states and municipalities Major water infrastructure firms include:
- Ameron (AMN): 2.37% dividend yield.
- Sterling Construction (STRL)
- Veolia Environnement (VE): 8.06% dividend yield.
- PowerShares Water Resources Portfolio (PHO): ETF that gives exposure to the US water industry.
Utilities have secure assets, steady cash flow, limited operational volatility, and provide income during downturns. They tend to match overall market performance as the market rebounds, but with much lower risk.
- Portland General Electric Co. (POR): strong exposure to wind. 5.40% dividend yield
- Xcel Energy Inc. (XEL): strong exposure to wind. 5.10% dividend yield
- Florida Power & Light (FPL): largest US wind developer. 3.48% dividend yield
- Aqua America (WTR): largest US water utility. 2.6% dividend yield
DIsclosure: PBW, FSLR, SPWRA, VWSYF, ABB, ENOC.