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Aria Melton is a green entrepreneur. She reads widely on economics and environmental issues and supports animal rescue charities. Aria successfully started, operated, and later sold two green businesses. She has a keen interest in investing in companies that make a difference in the world and... More
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Aria Melton - Ethical Investing
  • Ethical Investing, Lesson 7: Preferred Industries 0 comments
    Nov 26, 2011 5:48 PM | about stocks: UNP, WFM

    Some industries are inherently more ethical than others, and the ethical investor must choose which industries to exclude. Your personal blacklist may differ from mine, which excludes the following:

     

    Tobacco

    Alcohol

    Weapons

    Manufacture of toxic chemicals

    Gambling

     

    Enough said. Now that I've eliminated all the fun stuff, let's move on to the good guys. I have selected three to discuss: alternative energy, green"er" transportation, and organic food.

     

    Not withstanding the second law of thermodynamics, alternative energy is here to stay. Solar, wind, and geothermal power are cleaner, safer, and potentially more economical than conventional power plants. As Earth's population continues to rise, more power will be required. Since sunlight and wind are free and the supply is essentially infinite, they are better suited to meeting future energy needs than non-renewable fossil fuels.

     

    Two things seem clear. One - alternative energy will only provide a small proportion of our needs in the next few decades. Two - like other emerging industries, there will be many failures and only a few successes before these industries mature. With that in mind, the ethical investor needs to be especially vigilant in picking winners and avoiding losers.

     

    From an ethical perspective, it's hard not to like solar power (especially localized solar power), but I advise investors to seriously consider wind power as well. The global installed capacity for wind energy grew by roughly 600 percent in the last decade, and the boom is likely to continue. Stock selection is important here as solar manufacturers tend to be loaded with debt. I'm watching Nordex (XETRA: NDX1.DE), a German company which has a growing presence in Asia, Europe, and the US. Nordex has $228 million in cash to $252 million in debt, but EBITDA is a healthy $38.6 million, and the company recently completed its biggest wind farm to date. Trailing P/E is a little rich at 22.6, and the stock is currently at its 52-week low of $3.82 (down from $9.36 in April). Unlike some of its competitors, Nordex has weathered the last four years and stayed profitable. It is a likely survivor.

     

    Greener transportation is on the rise. As gas prices continue to climb, more people are buying bicycles, taking the bus, and buying train tickets. Railroads are also the most efficient means of transporting goods that we have on Planet Earth.

     

    Union Pacific Corporation (NYSE: UNP) is still chugging along. It's the largest railroad network in the USA, and although it no longer operates passenger service, many Amtrak trains use Union Pacific rails. Railroads enjoy some of the best moats on the planet. UNP is no exception. The company's debt is a reasonable 20% of its market cap, but with $1.7 billion in cash, 10 percent quarterly earnings growth, and EBITDA approaching $7 billion, the financial metrics are comfortable. At $95.16 a share, it's dipped a bit since July's high of $106.76, and is recommended at current levels.

     

    Organic farming has been making a gradual comeback for decades. Modern pesticides are so strong that many conventional farmers will not feed their families chemically treated produce from their own farms. Additionally, organic foods do not contain GMOs, which may ultimately prove to do more harm than good.

     

    Whether you love or hate Whole Foods (NASDAQ: WFM), they are still booming, with quarterly earnings growth of 31.3%. Debt is a negligible $17.9 million to $654 million in cash - and is raking in an EBITDA of $843 million. The stock is currently trading at $63.55, and as the economy continues to recover, more environmentally concerned consumers are likely to do at least some of their shopping at Whole Foods. The valuation is a bit high at 24.4 times forward earnings, but WFM enjoys profit margins which appear to be at least 50% higher than the typical food retailer. The willingness of consumers who want organic food to pay extra for what they want provides some of Whole Foods' competitive advantage. I'm putting this on my watch list, as I would prefer to purchase it below $55.

     

    What are YOUR preferred industries?

    Stocks: UNP, WFM
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