Finding Value and Growth In The Green Sector - Invest In Green 2009 - Special Report

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Finding Value and Growth In The Green Sector

Published: Sunday, 15 Nov 2009 | 6:21 PM ET

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By: Jennifer Woods
Special to CNBC.com

Those looking to turn a profit in the green space are most apt to do so by investing in stocks that are poised to benefit from (or are impervious to) government funding, have strong regulatory support and dominate an essential niche in the green market.

Michael Herbst, a mutual fund analyst with Morningstar, says “government policy has traditionally had a big impact on this area, and is likely to in the future. It is not uncommon to see certain segments of these stocks rally on some political news, only to crater when the news doesn't materialize.”

“My sense is that government policy this time around may be a touch more clearly communicated and clearly directed,” he says, but quickly adds, “but that again doesn't guarantee either success to these companies or to the stocks.”

Jens Peers, portfolio manager for the Calvert Global Alternative Energy Fund and Global Water Funds, says the areas that he really likes at the moment are the areas that are not too dependent on government funding, but have strong regulatory support. High on his list: air and water treatment.

Water

“The general environmental treatment of air and water pollution should be on your radar,” he says. One company he likes is Calgon Carbon [CCC Loading... () ], a play on the water purification space.

Calgon, says Peers, has two main lines of growth: activated carbon and ultra violet light equipment, which are used to treat water. Both of these business lines are supported by government regulation, specifically mandates from the Environmental Protection Agency.

“It’s a solid growth area with high barriers of entry,” says Peers. He expects Calgon’s growth to continue through 2010 and 2011.

“They will have significant pricing power [and] they are not really depending on economic growth or funding,” he says. Additionally, the valuations are still relatively low.

Solar

Solar is a segment that often draws a lot of attention in the green space, however, Peers warns that it is an area that should be entered into cautiously.

“You have to be careful about your amount exposure in the solar sector. There are some companies that will be massive winners but also some that will be big losers."

“It has been a difficult year so far [as] subsidies are being cut,” he says, and notes that there is also an over supply of solar cells.

However, price declines have been less than expected and while it will likely be a tough six months ahead, investors who look beyond that time frame could benefit.

One name in the solar space that Peers likes is MEMC Electronic Materials [WFR Loading... () ], which produces wafers for semiconductors and solar cell devices.

“Both of these industries have bottomed out and are going into a recovery phase,” he said adding that this is more of a valuations call as valuations are low and the company has a strong balance sheet.

Jack Robinson, founder of Winslow Management Company, which offers green mutual funds and investment services, is also cautious about the solar sector, likening its course to that of the internet space at the turn of the century.

“A few years ago you couldn’t get a solar panel and today we are awash with them,” he says, adding that there will be some winners and some losers, making it a tricky space to invest in.

One name he likes is First Solar [FSLR Loading... () ], which makes solar modules using a thin film.

They are the largest producer of solar in the world and they are extremely profitable, Robinson says. “It is and will continue to be a leader in the space. They are the lowest cost producer and very focused on reducing cost per watt,” he said.

However, the stock has been under pressure as investors digest all of the developments in the solar market and wait for a clear direction on what will happen in the carbon space.

Wind

Wind is also an area of interest to Robinson, who said that investing in makers of wind turbines is one of the best ways to play that space.

Photo: LMT

The largest company in this space is Vestas Wind Systems [VWDRY Loading... () ], a Denmark-based company that has more than 39,000 wind turbines worldwide.

According to Robinson, in this space, “there is no technology risk, just incremental enhancements... It’s just a matter of getting the right sites and getting the capital to develop.”

Within the wind arena, Peers of Calvert (who also favors Vestas) also likes Spanish company Iberdrola Renovables [IRVDY Loading... () ].

This company, he says, is the number one wind developer in the U.S. and has gotten a lot of stimulus money to develop projects.

“They have a lot of sites still to be developed in U.S. and are perfectly placed to benefit from stimulus money,” he says. Additionally, they don’t have funding issues and their valuation is extremely attractive.

Geothermal

Another area that Robinson likes is geothermal, which he says is a very green technology that offers a “wonderful way to preheat or pre-cool energy systems.”

One pick is WaterFurnace Renewable Energy [WFI Loading... () ], which makes and distributes geothermal and water source heating and cooling systems for residential, commercial and institutional uses.

Peers considers the firm a clear leader in the geothermal space, he said.

In terms of energy efficiency, Robinson said companies that provide heavy insulation and other energy efficient technologies are also of interest. These include companies that insulate doors and widows, provide efficient glass and efficient lighting in order to lower costs and reduce carbon footprints.
A name he likes in this area is Acuity Brands [AYI Loading... () ]. Acuity, is focused on providing LED (light-emitting diodes), which Robinson believes will be the future for all lighting as it is the most efficient in terms of costs to light areas. Within this space, he said, “Acuity is definitely going to be a leader”.

While investors will likely benefit from making bets in the above-mentioned areas, most experts recommend investors avoid investments in biofuels.

Buofuels

According to Herbst of Morningstar, biofuels (outside of algae-related efforts) are on the back burner for now due to over production, cost and viability concerns.

Additionally, he said, political backlash against ethanol also dealt these stocks a severe blow in late 2007 and early 2008, which caused many companies to fold as a result.

Peers of Calvert agrees, adding “we are still quite cautious on biofuels. There is a lack of infrastructure and the political support is going to electric vehicles.”

Additionally, he said, “margins continue to be squeezed and funding is still a big issue”.

When making future bets in the green sector, there are various upcoming developments investors should be aware of.

According to Peers, while not much is expected to come out of the Copenhagen Convention on climate change in December, investors should look for comments on carbon emissions markets and treatment as it could create opportunities on the carbon trading side.

Additionally, he expects a bill on carbon trading to be passed in 2010, which would likely include a cap-and-trade system as well as hard targets on the production of renewables.