Among the dozen stocks picked by my panel of professional green money managers for 2014, most followed three themes: Solar stocks, IT stocks, and income stocks. Two didn't, and they are included here.
This Cash-Rich Water Company Could Produce a Big Dividend
The first is a Japanese water utility, picked by Rafael Coven, the Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)
Coven likes Kurita Water Industries Ltd. (Japan:6370, OTCPK:KTWIF) which "On restructuring it has a ton of cash" and generates a lot of cash despite zero growth. He calls Kurita "Terribly managed and a great candidate for takeover, breakup, dividend, or LBO," although that "Doesn't happen easily in Japan."
Kurita is like Companhia de Saneamento Basico do Estado de Sao Paolo (NYSE:SBS) picked by Jan Schalkwijk CFA, a portfolio manager with a focus on Green Economy investment strategies at JPS Global Investments, in that it is a water utility, but the forward dividend yield is only 2%, so I don't see it as an income stock like SBS.
Investors betting on Kurita should be prepared to wait, as is Coven: he took pains to point out that he looks for stocks that should perform well over a longer time horizon than just one year.
Note: After this article was first published, Coven left a comment saying,
I may have overplayed my interest to Tom in Kurita as a speculative play.
While Kurita is a candidate ripe for breakup or a takeover (likely hostile), those are not attributes relevant to its inclusion in The Cleantech Index. In fact, this week, we announced that Kurita is being dropped from The Index.
Cleantech Index companies must pass 18 quantitative and qualitative screens for inclusion including industry leadership, organic growth, management quality, intellectual property, etc. In contrast, it's become increasingly apparent over the past few years, that Kurita's deteriorating performance has had less to do with Japan's economic malaise than with poor management, Kurita's entrenched "utility culture", lack of attention to shareholder interests, and failure to innovate. As testament to this, Kurita has demonstrated only negligible success in the Asia's booming market for clean water.
Buying stocks on the expectation of a takeover/or pro-shareholder action/pressure is a questionable investment premise even in shareholder friendly countries. However, I would caution investors even more from such a strategy in a country where activist shareholders and hostile takeovers are rare, and shareholder interests of lesser importance. It may be a very long wait and the underlying business can deteriorate in the interim.
The "water" sector has been a sexy investment theme for a quite a while, but few water companies ever consistently deliver returns above their cost of capital. Even Siemens has thrown in the towel on this business. There are very, very few good water companies, period.
I'd rather place my bet on a diverse portfolio of companies that are the leaders in their fields and demonstrate the ability to grow organically and generate sustained profit growth - especially if they have a global megatrend behind them that's likely to last for decades.
After I followed up on his seeming change of heart, it turns out we had miscommunicated about his picks. He had initially given me four, and when I asked him to pare it down to three, he misunderstood, and gave me three different ones. His "real" three picks are:
This Waste Gasification Company's Luck Has Changed
The other offbeat pick was from Schalkwijk. He likes Alter NRG Corp. (TSX:NRG, OTCQX:ANRGF), which he calls his "dark horse."
This Canadian waste-to-energy company had been a disappointment for years. Though its Westinghouse plasma gasification technology held great promise, large projects failed to materialize and the company lacked focus as it also tried to be a developer in the fragmented geothermal heating sector.
Recently, the company's luck has changed: It won a big contract for a gasification plant in England from Air Products, a new CEO was brought in and Roman Abramovich (Russian billionaire and owner of Chelsea Football Club) made a strategic investment in the company. Subsequently, the company has won a 2nd big order from Air Products and various licensing deals.
One of my other panelists, Sam Healy, a portfolio manager at Lamassu Capital, chose not to make any picks at all this year because he feels most stocks are simply too expensive. In expensive stock markets, it often makes sense to look for value in offbeat themes. That, and the increased diversification, are good reasons for cleantech investors to give Alter NRG and Kurita their consideration.
Disclosure: I am long SBS and the green hedge fund I co-manage with Schalkwijk is long Alter NRG.
Disclaimer: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.