by Rona Fried
| This article is an excerpt from “How to Invest in this Stagnant Economy: Public Markets,” from the December 2002 issue of Progressive Investor, an information service of SustainableBusiness.com. |
Most people think the current stagnant economic conditions will continue for the near future. Where might sustainability investors put their money to work during this kind of climate?
This article looks at what the experts suggest as best bets in the public markets. We spoke with Eric Prouty, Principle & Senior Technology Analyst, Adams, Harkness & Hill; Jack Robinson, Managing Director, Winslow Management Co., Green Growth Fund; Ken Scott, Portfolio Manager & Social Research Analyst, Walden Asset Management’s SmallCap Innovations Funds; and Terry Foecke, Principal, Materials Productivity, Inc., a 20-year old clean manufacturing consulting firm.
PI: Which direction do you think the economy’s going and how would you invest during this stagnant economy?
Eric Prouty: AHH
I think we’ve hit the bottom but there is no sign of a rebound. I think we’ll bounce along the bottom for some time. In this kind of choppy stock market, stick with companies that have enough money on hand to get them through these dry times.
Itron (ITRI), Intermagnetics General (IMGC) and IMPCO Technologies (IMCO) are profitable companies that we believe can do very well even in a difficult economic environment.
Itron (ITRI) is one of the world’s largest automatic meter reading companies. Their product saves money for utilities and is an important energy efficiency tool. Utilities can compile usage data, do potential load control, and load management operations.
Intermagnetics General (IMGC) is another energy efficiency play – the company is a big player in superconducting wire, which eliminates the 8-12% loss of electricity that occurs during transmission between a power plant and end user. IMGC supports the development of this side of the business (which is 10 years down the road) with its profitable cash cow – it makes MRI machines – a health care business that’s not very sensitive to big economic swings.
IMPCO Technologies (IMCO) is a “clean air” play. It converts engines that run on diesel or gasoline to natural gas or propane – cars, buses, forklifts, and diesel generators. They have contracts in emerging markets like India, China and Mexico, where the air is very polluted.
PI: Where would the fuel cell companies fall as investments in this economy?
Eric Prouty: AHH
All the fuel cell companies are development stage companies – they are not earning money yet and are burning through cash. Ballard Power is the exception. The company has hundreds of millions of dollars on their balance sheets. If things stay tough for a couple of years they can get through it.
PI: Next, we asked Jack Robinson of Winslow: How do you feel about investing in clean energy companies in this economy?
Jack Robinson: Winslow
I like to compare the clean energy sector to Healthy Living (HL) companies like Whole Foods. Today, the HL companies are profitable, but 7 or 8 years ago, they were just emerging and coming into their own. just like the alternative energy sector is today.
Some alternative energy technologies are starting to be economically competitive. Wind is a great example. The wind turbine stocks are beaten down, but the wind industry grew 40% in Europe last year. It’s running into a problem in the US because the investment tax credit wasn’t renewed in time, so it’s been sort of a throwaway year.
Wind turbine companies over-expanded expecting huge growth in the US market, which hasn’t materialized yet. Vestas stock just took a huge hit because, although the company is profitable, they planned for 50-60% growth, when it’s going to more like 25%. It’s just a growing pain.
Whole Foods made similar mistakes early on – every emerging growth company stumbles at some point.
The solar energy space is experiencing a situation. Here again the industry over-expanded and over-promised feeling they could grow at 50% a year in a 25% growth industry. They are in the same mess for the moment – over-exuberant on the revenue growth. They will get through this and as their revenues and their profitability begin to pick up, their stocks will rise. Many companies won’t make it though – that’s the nature of technology in this space.
But it’s a very, very interesting area. If you do your homework, there’s really a lot of money to be made in this space.
Vestas is the alternative energy company we think we do well under these economic conditions. We invest in Astropower but it isn’t one of our larger holdings. I don’t think they’ve come to grips with the fact that they can’t grow at 50%. They need to fully embrace realistic expectations and reset their internal business plans to meet them. There’s nothing wrong with 20% growth!
PI: Why don’t I hear any of you mentioning Evergreen Solar? Are they too small?
Jack Robinson: Winslow
Yes, they are very small and they’re a little late to the solar party. Their technology is interesting but so was Apple Computer’s. Being early with new technology is really pretty important. There are lots of large companies producing PV cells and systems. And they’re not commercial yet.
PI: Ken Scott of Walden, How do you recommend investing now?
Ken Scott: Walden
Small cap stocks are where sustainable investors find most opportunities in line with their objectives. We caution investors to keep only a portion of their assets there, and to be well-diversified by sector and by specific companies. There are significant risks associated with those stocks – price volatility and company-specific issues that can arise.
We’re not trying to make bets on or emphasize a sector or company over another, except that the company is in the portfolio. We keep each stock at no more than 2% – if it increases out of proportion to the whole, we sell the excess. We don’t have a “favorite top 10 holdings;” we use a portfolio approach. We look for a bunch of companies in each theme. Sustainability investors should look for a broad range of companies.
PI: What companies do you invest in the solar sector?
Ken Scott: Walden
Astropower and Spire. Evergreen has a great product, they seem like a good management team, and they’re in expansion mode. Their long term is promising but we’re not investing in them yet.
PI: Lastly, we spoke with Terry Foecke. Is there a theme – a type of investing that you would do during in this economy?
Terry Foecke: Materials Productivity
I’m looking for companies that either offer a dividend so that I get paid to wait or who have something that is making money and growing i
ts earning power, and I think is going to explode upward as the economy heals.
Mettler-Toledo (NYSE: MTD) makes precision measuring instruments that can be used to increase eco-efficiency, reduce waste generation and make better products. The company is in all the major segments, they’re dominant in several segments, and is growing nicely.
Power Integrations (POWI: Nasdaq) makes a device that practically eliminates “Vampire” or “Standby” power. Any appliance uses energy even when it’s turned off – estimated at about 10% of total electricity use. I think people that buy the stock now will see really nice returns in the next 2-3 years.
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| Rona Fried is President of SustainableBusiness.com. Contact her: rona@sustainablebusiness.com |
This article is an excerpt from “How to Invest in this Stagnant Economy: Public Markets,” from the December 2002 issue of Progressive Investor, an electronic newsletter available by subscription at www.sustainablebusiness.com. Each issue includes conversations among world-class sustainable investment analysts on viable green business investments.
To purchase this issue ($29), please contact rona@sustainablebusiness.com.
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