Three Investment Trends That Benefit From Cap and Trade

The political and financial message boards lit up late Friday after the House passed the controversial cap and trade bill. The bloggers have done an excellent job explaining why this bill could be extremely damaging to the economy and despite the rhetoric about creating “green collar” jobs, it will likely put more Americans out of work in the long-run.

While the bill was passed late in the day Friday in what appeared to be an effort to slide it under the radar relatively un-noticed, no one should be extremely surprised by the measure. The Obama administration has made it exceedingly clear that this would be an important part of his agenda and however misguided the bill may be, it has been expected for some time. Today I’ll abstain from too many judgments as to the bill’s merits and instead focus on the investment opportunities that will surface as a result of cap and trade initiatives.

Energy is the Obvious First Beneficiary

At ZachStocks, we have been carefully watching the alternative energy sector as stocks have begun to rebound from early 2009 lows. After achieving rock star status in late 2007 and early 2008, solar energy stocks experienced particular weakness due to overcapacity, falling prices on traditional energy sources like oil and natural gas, and a liquidity crisis which put many expansion projects on ice. Today, many of those concerns are alleviated with prices of oil and natural gas back on the rise and global stimulus dollars pouring into projects to build factories, solar farms, and transmission grids.

Some of the stocks that show the most promise include LDK Solar (LDK), First Solar Inc. (FSLR) and Renesola Ltd. (SOL). While overcapacity may be the primary remaining concern for the industry, prices are dropping quickly and government subsidies are paving the way for demand to pick up the slack. The cap and trade bill could go a long way to filling that gap and encouraging (read: forcing) much more demand for clean renewable energy.

Ironically, the cap and trade bill is unpopular with both the left and the right spectrums of politics. The left has argued that the bill offers too many perks to businesses which takes the teeth out of what is perceived to be a purpose of “punishing business.” From our standpoint as investors, it is important that legislators realize that in order to create jobs and promote the economy during this difficult time, there needs to be some olive branches extended to business in order to help with employment levels.

Trading Exchanges Overlooked but Full of Potential

I’ve read very little press about the actual “trade” portion of cap and trade, but opportunity to benefit from the businesses that enable the trading of emissions credits could be significant. ZachStocks readers should be keenly aware of IntercontinentalExchange, Inc. (ICE) which was actually the first stock we discussed when the site was launched back in mid 2007 (hard to believe it has been 2 years now).

ICE had its beginning as an energy trading exchange and has methodically built its reputation as an Over The Counter (OTC) exchange, a futures trading platform, and most recently as a clearinghouse for many regulated and unregulated financial contracts. The company is one of the front-runners to participate in the trading of these carbon credits and could quickly begin to realize increases in revenue as the trade picks up. ICE has expertise in launching new trading vehicles so it would be a natural beneficiary of this new trend.

The New York Stock Exchange may be a dying icon of the past, but the parent company NYSE Euronext (NYX) continues to innovate and add new products to trade and new methods of trading. It would be very unlikely that a new exchange would be developed without NYX having at least some part in the formation or upkeep of the platform or contracts traded on that platform. As carbon credits gain popularity on an international level, NYSE Euronext’s expertise in Europe, Asia and developing markets could prove very useful.

Engineering and Infrastructure May Play a Key Role

The final area of opportunity I see with cap and trade involves companies who are active in helping retrofit plants factories and engines which are the prime producers of the capped emissions. We’ve looked at infrastructure in the past as another initiative by this administration has been to support this industry through building of bridges and roads, revamping the national electricity grid, and restoring federal buildings.

As power plants, chemical factories, paper mills and dozens of other industries scramble to cut down on emissions (and thereby cut down on the tax of buying carbon credits), companies like Fluor Corp (FLR), and Jacobs Engineering Group (JEC) will likely land some substantial contracts. These big conglomerate businesses may see their stocks increase a bit due to this new business, but smaller contractors like Hill International Inc. (HIL) and to some degree Aecom Technology Corporation (ACM) will have a better chance of yielding strong stock returns due to their smaller, more nimble approach.

So while the cap and trade bill will likely have significant and possibly very negative unintended consequences, there are opportunities for investors who are willing to overweight sectors who stand to benefit from this political move. I’m interested to hear what action you are taking to protect your wealth and grow investments despite changing political and economical trends. Please leave your comments and take some time this weekend developing a game plan to pro-actively approach markets based on the information we have today.

Disclosure: the ZachStocks Growth Model holds positions in several of the stocks mentioned.

Comments

[Ferdinand E...:]

The former boss of British Petroleum, Lord Browne, once thought that cap and trade made sense. Not too many months ago he said that it was nonsense.

Judgements of this type are overlooked by the US government and cap and trade boosters in Congress and elsewhere. However I am ready to believe that the new Secretary of Energy is smart enough to understand the deficiencies of cap and trade, and one day he will take steps to do exactly that. And, when that happens, he goes to the President and tells him to give one of those brilliant speeches in which - like Lord Browne - he informs the great American television audience that the measure is nonsense, and is being discarded immediately if not sooner.

Jun 28 09:55 AM

[User 689427:]

2 Things,

This bill if the Senate passes it, would not take effect until 2012.

There was no mention in the article about Applied Materials which was a leading lobbyist for the climate bill due to their move toward facilitating solar energy.

Jun 28 12:16 PM

[fran:]

cheers for lord browne and fe banks. i do not share your optimism about our DOE sectry. the USA looks to be headed into the same dilemma as EU has been in for several years. how/if this position can be reconciled with a "NEW KYOTO" will provide interesting entertainment.
the current ACES house bill is really meant to raise federal revenue. if it were otherwis, a clear taxation method of pain would suffice and be transparent; which the obfuscation being considered is not.
the "trading" aspect with all its financial overhead and scamming is not comprehended by the electorate.
but, since financial reform is in vogue, new market instruments to replace collateralized debts/swaps are a must.

On Jun 28 09:55 AM Ferdinand E. Banks wrote:

> The former boss of British Petroleum, Lord Browne, once thought that
> cap and trade made sense. Not too many months ago he said that it
> was nonsense.
>
> Judgements of this type are overlooked by the US government and cap
> and trade boosters in Congress and elsewhere. However I am ready
> to believe that the new Secretary of Energy is smart enough to understand
> the deficiencies of cap and trade, and one day he will take steps
> to do exactly that. And, when that happens, he goes to the President
> and tells him to give one of those brilliant speeches in which -
> like Lord Browne - he informs the great American television audience
> that the measure is nonsense, and is being discarded immediately
> if not sooner.

Jun 28 12:40 PM

[Zachary Sch...:]

Ferdinand - I wish I believed that your scenario would play out. However, the escalation of commitment appears to be in place where the deeper you become committed to an issue, the more you have to justify your actions instead of taking an objective look at the long-term consequences. This is a feedback loop which gets stronger through time. So a change in policy is not likely until we have tried and failed and moved on.

I like the comment about Applied Materials - possibly another opportunity although it is larger and more well followed than the companies I typically invest in.

What other opportunities are in play with cap and trade?
Zach
zachstocks.com

Jun 28 01:48 PM

[texasokie:]

Rolling Stone Magazine this week has a very interesting article about cap and trade and all the other messes that Goldman S has steered the US into and greatly hurt our financial condiditon. The author is Matt Taibbi and it is a must read.

Jun 28 03:32 PM

[Mad Hedge F...:]

It's time to face the new reality. If the 2009 Clean Energy Bill passes, it is going to pave the way for major structural changes to the US economy, which few of the non-engineering types voting for it in Congress understand. The bill encourages electric power utilities to switch to renewables, upgrade the electric power grid, and put in place a cap and trade system which places an enormous burden on the power industry to go green (see www.madhedgefundtrader...). The bill is expected to sail through the House, but faces a major fight in the Senate, where the administration is going to have to get all of their ducks in a row for it to pass. The bill provides the legal structure to spend that $100 billion for alternative energy already passed in the stimulus bill. In his cheerleading press conference for the bill, Obama correctly declared that dependence on hydrocarbons was jeopardizing our national security. He also cleverly described this as a massive creator of high tech jobs that can’t be exported. I’m not highlighting this because I live in California, wear sandals all year, drive a Prius, or have a refrigerator stuffed as if a giant gerbil does my shopping. Since this economic crisis started, the key has been to buy whatever the government is buying, and since they are going into alternatives in a big way, you want to be right ahead of them (see my solar piece at www.madhedgefundtrader...). Time to add more alternative energy names to your list to buy on dips. Look at American Superconductor (AMSC), which is involved in advanced wind turbine designs and electric power grid upgrades. Also take a peek at Covanta (CVA), an established business that profitably burns trash to create electricity.

Jun 28 04:06 PM

[T-table:]

don't over look SGR as emission control and nuclear power are a significant portion of its revenue

Jun 28 06:52 PM

[RECON605:]

CAVEAT EMPTOR.

It still hasn't passed the Senate.

This is a hidden tax on all all Americans including small/mid-size businesses.

Jun 28 09:36 PM

[Paul Price:]

Cap and trade will make America non-competitive in world markets and lead to a huge LOSS of US-based jobs.

Your utility bills will double or triple within 2 - 3 years.

Jun 28 10:03 PM

[Jake2:]

A promo for ZachStocks? Yes, I guess so. Find lot of them in this space . . . .

Jun 29 01:19 AM

[TCK:]

Investment idea number 4;

Double short Dow, S&P, and Nasdaq !

Jun 29 02:32 PM

[LCM:]

What GS wants...GS GETS..... Goldman needs something "new" to manipulate....so the WH complies....shocking!!! NOT. Let's just give it up and buy GS stock...they own the world and it doesn't look like it's going to change anytime soon...even Buffet acknowledged it with 5 billion.....WAKE UP AMERICA!


On Jun 28 03:32 PM texasokie wrote:

> Rolling Stone Magazine this week has a very interesting article about
> cap and trade and all the other messes that Goldman S has steered
> the US into and greatly hurt our financial condiditon. The author
> is Matt Taibbi and it is a must read.

Jul 03 12:39 PM