Shorting the Least Green Companies

I'm getting more and more company in worrying about a market peak. If you, like me, are

1. Interested in green investing, and

2. hedging your exposure to a market decline,

you should probably also be interested in turning Newsweek's Green Rankings upside-down, and use some decidedly un-green companies as a hedge against the market risk of your greener portfolio.

If you believe that green investing is likely to lead to long-term out-performance, then it is just a small step to believe that shorting distinctly brown stocks will not only spruce up your overall performance; it should be even more effective than buying green stocks.

This is because there is generally more potential to out-perform the market on the short side than the long side. Most investors are long-only. If they feel a stock will go down, all they can do to express that sentiment is not buy it. Similarly, analysts prefer to cover stocks that they like. It is more comfortable to be on good terms with the companies that you deal with every day. If you really think company X is a dog, wouldn't it be easier to just cover company Y instead, rather than trying to get information out of hostile management?

Green investors looking to hedge their market exposure should therefore both do well and do good by shorting the bottom of the Green Rankings, an idea I first brought to readers' attention in spring of 2008 with a list of stocks we love to hate. Those stocks all fell, but so did everything in 2008.

Five Stocks to Short

The bottom of the green rankings is dominated by Utility companies. These companies are generally regulated and must convince their regulators that their investments are "prudent." The flip side of the bargain is that they are allowed to earn a return on any such "prudent" investments, even if those investments end up being quite foolish in retrospect. Hence, utility customers are more likely to bear the costs of environmentally harmful investments than shareholders. For instance, New York ratepayers are still paying the bill for the Shoreham Nuclear Generating Station, even though it never generated a watt. If I could short my electric bill, I might, but barring that option, I prefer to look at other sectors for brown companies to short.

Fittingly, Number 500 on the list is coal company Peabody Energy (BTU), an another coal stock, Consol Energy (CNX) is number 496. A strong carbon cap-and-trade policy will probably lead many coal-fired power plants to fuel-switch to natural gas, or to displace some coal by cofiring wood pellets, so these companies are a fitting part of a green's short portfolio.

Also near the bottom of the list are food and beverage giants ConAgra Foods (CAG) and Bunge (BG), at 497 and 493. Besides having no green credentials to speak of, ConAgra may be hurt if input prices rise as food is diverted to make biofuels, but Bunge, which has agriculture as well as food interests could actually benefit.

Number 484 is asphalt, aggregate, and concrete supplier Vulcan Materials (VMC), ready to supply the stuff needed to pave paradise and put up a parking lot.

I can't say that I'm personally shorting any of these yet. I may as I need to replace other short positions. I generally use shorts (or short spreads) on general market indexes as the mainstay of my hedging strategy. My few non-index short positions are mostly in the airline industry, which is exposed both to the economy in general, and oil prices in particular. Newsweek lumps these into Media, Travel, and Leisure, and the worst scoring airline was Delta (DAL) halfway up the list at number 256.

Of the five above, the one I'm most likely to short is Vulcan, because the company has exposure to the housing market (which I do not expect to recover for a long time), climate change, and peak oil. Cement is a large contributor to global CO₂ emissions, and asphalt is a byproduct of oil refining. As refiners install more crackers and other equipment to squeeze more liquid fuels out of a barrel of oil, it is at the expense of asphalt production.

DISCLOSURE: Tom Konrad and/or his clients have short positions in DAL.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Comments

[Jasper M:]

The green mythology, having been effectively shielded from effective peer review for some time, is already starting to come apart under progressively more robust critical analysis. By the time this Ursa Major bottoms out, years hence, it will be largely recognized as the crock it truly is, almost pure fraud, front to back. And times will be desperate enough that greenness will be the least of everyone's worries.

Which might make such conditions a good time to Buy these stocks. I will keep them in mind.

Sep 27 03:44 AM

[Michael Clark:]

I have to agree with this. 'Green' has become a yuppie euphemism for 'we are the good guys'. But life is rarely so simple as to just find virtue by attaching a label or a colored ribbon to a product. Solar? Yes. But solar is not enough, except on a very small scale. And solar will never win the war as long as it remains a technology that is so expensive it only appeals to the upper middle class and the rich. Nuclear fusion is a better model -- but we aren't there yet. When I hear the word 'sustainabiity' I want to puke. It means nothing now except a mandate to be politically correct on the surface. And 'global warming'...don't get me started.


On Sep 27 03:44 AM Jasper M wrote:

> The green mythology, having been effectively shielded from effective
> peer review for some time, is already starting to come apart under
> progressively more robust critical analysis. By the time this Ursa
> Major bottoms out, years hence, it will be largely recognized as
> the crock it truly is, almost pure fraud, front to back. And times
> will be desperate enough that greenness will be the least of everyone's
> worries.
>
> Which might make such conditions a good time to Buy these stocks.
> I will keep them in mind.

Sep 27 03:56 AM

[captainccs:]

Green is a religion and, as such, it requires no facts to sustain it, only faith. But religious movements are very powerful so don't underestimate the effects of the Green religion on our lifestyles.

That said, shorting brown stocks does not seem like a good idea at all.

Sep 27 07:42 AM

[realold:]

You are obviously right. Green is an extreme religion and will prove to be an emotional decision that its converts may live to regret.
As with all religions,not everyone goes along on blind faith, so I cannot see how investing in green is a good idea. Investing in brown energy doing business in the rest of the world seems like a much better idea.

As for asphalt, is it more green to drive on dirt roads? More green to make transportation use as much fuel as possible to get from point A to point B by using only existing roads?

Greens can subscribe to a religion that is all sacrifice and poverty, but I would rather live a reasonable decent life and help my kids prosper. They can stay in crime ridden inner cities, cramped spaces, eat weeds, look at pictures of nature, and ride their bike, I will live as far out in the country as I can get and enjoy a good steak.


On Sep 27 07:42 AM captainccs wrote:

> Green is a religion and, as such, it requires no facts to sustain
> it, only faith. But religious movements are very powerful so don't
> underestimate the effects of the Green religion on our lifestyles.
>
>
> That said, shorting brown stocks does not seem like a good idea at
> all.

Sep 27 12:20 PM

[spald_fr:]

One has to be selective regarding green technology because there is so much snake oil to be sold. Associate with sane scientists who truly believe in peer review.

There's a genuinely great development effort to produce 1-4 butanediol and derivatives from fermentation products based upon the well know degradation products of the Krebbs acid cycle, especially succinic acid. I'm going to write an article specifically on this effort within the next 3 months and publish it here at Seeking Alpha.

Sep 27 12:42 PM

[CLH:]

You hve to be kidding. The green movement is an antiscience religion and nothing else. Yes those with few brains will be sucked in and lose their money. Of course that is the purpose of the market.

Sep 27 12:58 PM

[GMiki1:]

Let's sit in the dark and shiver as we short the viable energy stocks.

Sep 28 11:26 AM

[Tom Konrad:]

Speaking of antiscience religion, I seem to have offended one, judging by the last 7 comments, most of which seem to be reactions to the title, not the content of the article.

I do agree with the more rational commenters above that shorting a stock just because it is no "Green" makes no more sense than buying one just because it is "green." Investing needs to be much more focused than that to be successful.

Airline stocks, however, are probably doomed by peak oil, which is why I am currently shorting them.

What's greener than driving on asphalt? Carpooling on asphalt: it requires a lot less asphalt.

Sep 28 11:46 AM