"Long term investors earn return on capital when investing in identifiable trends," says Brian Salerno of Huntington Funds in an interview with Kapitall. He's partial to one trend in particular: Environmental responsibility.
He's so keen that he talked Huntington Funds into launching the very first environmentally focused active exchange traded fund (ETF), the Huntington EcoLogical Strategy Shares ETF (HECO). Salerno makes sure to point out the capital L for logical, as in profit.
On why ecological investments are smart investments
A Harvard Business sustainability study showed that over the long term, in this case two decades, companies that pay attention to environmental social impacts tend to report superior performance. In addition, companies better at incorporating environmental responsibilities are inherently better-protected and defended against regulatory threats.
"That got me thinking. The rise of environmental responsibility is a global megatrend: Alternative energy, biofuels, recycling, organic food, fuel efficiency, smart grid, biodegrade materials, we realize it is all one thing."
Eco investments are in every segment of the economy, so Salerno pays no heed to the funds and indexes narrowly focused on solar panels and electric cars. He says these are immature industries with "unproved business models."
Huntington's stock picking strategies can be found in detail here. They emphasize growth, a solid business model, and long-term sustainability. As Huntington's Mike Weiner described it, "We invest in good stewards of the environment, who are also good stewards of our capital."
Fund favorites: Today's winning eco industries
Organics: "Organic food is an identifiable green industry that is rapidly growing. There are many companies today with solid investible [sic] business models. They're not waiting around for any subsidy check from the government."
Salerno particularly likes the organic grocer Whole Foods (WFM) and The Hain Celestial Group (HAIN), maker of a number of earthy natural organic products from teas to skin care products. These two firms represent the top holdings of the HECO ETF.
Long-term growth potential is staggering. Many of us and many of our children will grow up to feed their children only organics. It goes to follow that when our children become investors, they're going to want environmentally responsible investments, and all the companies that want to be purchased by these investors will improve their practices. "It's a feedback look that will get stronger and stronger."
Some unlikely suspects can come up in a search for environmental responsibility.
Consider Tennant Company (TNC) , which specializes in floor scrubbers. At first look this may seem like an odd eco choice, but their business is quite logically connected; they incorporate a technology that ionizes the water they put on the floor that bonds on the molecular level with dirt and bacteria and sucks it back up clean. It kills bacteria and completely removes the demand for bleach and other harmful chemical cleaners that enter our home and water system. What's more, it functions better than bleach simply because human error is so prevalent (did you know it takes a number of minutes for bleach to kill bacteria? People typically don't let the chemicals sit long enough).
"Over long term I think this kind of technology can be incorporated into a lot of different applications. It's an up and comer I really like. It's a small company with no subsidies and a totally green and ecological name." He adds, "If we suddenly, as a planet, start to calculate the cost of flushing chemicals down the drain, then companies over time will have to record the chemicals they send down," implying TNC's niche in correcting that problem.
Trex Company (TREX) is a great recycler. The firm takes grocery store plastic bags and mixes with sawdust to create composite boards for deck projects. The company's stock took a hit with the housing market but is slowly coming back. "Eventually profits will rebound, and the firm is only operating at about 50% capacity right now."
EBay (EBAY), Disney (DIS), Johnson & Johnson (JNJ), and Starbucks (SBUX) are great franchises Huntington likes and thinks have more growth ahead. "They find their way in our universe because they are good environmental stewards."
The waste management leader aptly named Waste Management (WM) also fits and has been noted in the past for their environmental actions, including making 90% of new trucks natural gas powered. "Their business is in waste energy, and it's a good company. We don't own them today, but we could own them."
Water is an issue that spans from scarcity to reuse to cleanliness and overpopulation, so Salerno has his eyes on several filter and equipment companies that specialize in big water projects. This includes Tetra Tech (TTEK) which provides consulting and engineering for big development projects and is involved in all kind of water treatments and cleanups.
More "obvious" players are often ruled out. This is includes desalination, which turns salt water into fresh drinking water. It's a tough play because it's a lumpy business requiring multi-billion-dollar efforts and is often part of other corporations. General Electric (GE) is a good example of this.
Business section: Investing ideas
Looking to "green" your portfolio and make logical investment choices? You could do much worse that starting with the top picks of the pros.
Here's The EcoLogical Strategy ETF top holdings as disclosed in the interview dated June 18, 2012. All of these firms either have environmental theme or are good environmental stewards, meaning their business could have nothing to do with the environment but they are incorporating environmental responsibilities in their daily company by managing and measuring their impact and holding themselves to tougher guidelines.
Do you agree this trend will continue to gain traction?
1. The Hain Celestial Group, Inc. : Together with its subsidiaries, manufactures, markets, distributes, and sells natural and organic food, and personal care products in the United States and internationally.
2. Whole Foods Market, Inc. : Engages in the ownership and operation of natural and organic food supermarkets.
3. eBay Inc. : Provides online marketplaces for the sale of goods and services, as well as other online commerce, platforms, and online payment solutions to individuals and businesses in the United States and internationally.
4. Questar Corporation (STR): Operates as an integrated natural gas holding company.
5. Spectra Energy Corp. (SE): Engages in the ownership and operation of a portfolio of complementary natural gas-related energy assets in the United States and Canada.
6. BorgWarner Inc. (BWA): Engages in the manufacture and sale of engineered automotive systems and components primarily for power train applications worldwide.
7. LKQ Corp. (LKQ): Provides replacement parts, components and systems needed to repair vehicles (cars and trucks). Has a focus on used, recycled and refurbished products.
8. Johnson & Johnson : Engages in the research and development, manufacture, and sale of various products in the health care field worldwide.
9. Starbucks Corporation : Operates approximately 16,858 stores, including 8,833 company-operated stores and 8,025 licensed stores.
10. NextEra Energy, Inc. (NEE): Engages in the generation, transmission, distribution, and sale of electric energy in the United States and Canada.
11. Teradata Corporation (TDC): Provides enterprise data warehousing solutions, including enterprise analytic technologies and services, and integrated marketing software.
12. Costco Wholesale Corporation (COST): Operates membership warehouses that offer a selection of branded and private label products in a range of merchandise categories in no-frills, self-service warehouse facilities.
13. Walt Disney Co. : Operates as an entertainment company worldwide.
Written by Rebecca Lipman.