Three Investment Trends That Benefit From Cap and Trade

by: Zachary Scheidt

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 (NYSE:LDK), First Solar Inc. (NASDAQ:FSLR) and Renesola Ltd. (NYSE: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. (NYSE: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 (NYSE: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 (NYSE:FLR), and Jacobs Engineering Group (NYSE: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. (NYSE:HIL) and to some degree Aecom Technology Corporation (NYSE: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.