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Tips for green investing in 2009

In these dismal times, is it financially smart to do the environmentally right thing? Here's advice on navigating a sector fraught with risks.

January 04, 2009|David Pierson and Edward Silver

These days, everybody's an environmentalist. But as the new year begins, we ask whether in this dismal market it's possible to safely invest in green companies and funds.

The call to "go green" seemed to be reaching a fever pitch just a few months ago.

Then-presidential candidate Barack Obama was pledging to promote industries that were environmentally minded and invest federal money in creating green technology. Americans, tired of shelling out more than $100 at the gas pump to fill their oversize vehicles, were turning to hybrids in droves.

This would all seem to benefit the scores of green companies that went public -- perhaps even creating a bubble like the dot-com and housing booms.

But the green wave has been volatile, returning profits over prolonged rallies during boom times but falling particularly hard in recent months.

In the second half of 2008, renewable-energy shares tanked.

The WilderHill Clean Energy Index, a collection of 51 green companies, ended the year down 70%, compared with a 34% drop in the Dow Jones industrial average.

The often undercapitalized start-ups became especially vulnerable after the stock market meltdown because there was no longer cash available to fund the hefty upfront costs for wind and solar projects.

On top of that, the price of fossil fuels plunged, restoring conventional energy's status as the low-cost alternative -- costing investors lots of money. The Standard & Poor's energy index lost 35.9% last year.

"It got a little bit frenzied like the tech bubble in '98 and '99," said Brent Kessel, co-founder of Abacus Wealth Management.

Venture capitalists backed projects that weren't fully thought out, and investors rushed in too.

"Fundamental principles of investment weren't being followed by those putting money into green companies and mutual funds," Kessel said. "It was like they were interested in whatever was sexy. The story is always the same. The players just change."

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The old rules apply

So how does an investor navigate a sector so fraught with risk in the new year?

First, resurrect the old rules: Do your homework. Don't invest money you can't afford to lose, and don't put all your money into any one sector.

For Kessel, careful green investing means buying shares in an array of companies that are turning a profit -- a seemingly basic requirement that was often ignored during the rush to acquire green shares.

Then, be patient.

These environmentally friendly companies may not make big money for a long time if at all -- a fact of life in the start-up world made more intense by the recession.

That's because green products and services are often more expensive than their conventional counterparts, and during hard times, discretionary spending is usually the first to go. But to ignore their long-term potential is shortsighted, Kessel said.

Investments in alternative-energy companies, for example, probably won't pay off immediately, but they might in five to eight years, he said.

Another key factor is the incoming Obama administration.

As environmental degradation continues, he and other world leaders will be under immense pressure to stem the damage. The plans that his administration lays out are likely to dominate the direction of the green movement.

Conservation and renewables will get another push in the form of public-works projects built into Obama's stimulus package. China, a prolific polluter as well as a center for green tech, is also unveiling a stimulus package.

Throughout the economy, companies large and small are champing at the bit to advertise themselves as green -- and cash in on what many believe will be a revolution in energy, household products and other areas.

"The American consumer wants to be involved in it, and big companies are increasingly interested because they desperately need growth themselves," said Jack Robinson, founder and president of Winslow Green Growth. The mutual fund was down 61.5% last year after gaining 23.5% in 2007, its fifth straight year of positive gains.

Another environmentally minded fund, Portfolio 21, declined 36% in 2008, also after enjoying five years of positive returns.

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Think sub-sectors

The green sector is so new that it's hard to even figure out what companies belong in it. Does Toyota Motor Corp., which makes SUVs along with hybrid cars? Does Whole Foods Market Inc., which sells organic foods but operates a huge supermarket chain?

It may be easier to break the sector down by company type.

The first and perhaps most obvious is energy. There are people developing sustainable fuels for cars and pushing to increase the amount of solar or wind energy that powers homes and businesses. That also extends to companies developing power cables to deliver that energy to urban centers.

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