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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

Alternative-energy companies could receive a boost if fuel prices go back up, as could makers of hybrid cars. Californians are already experiencing a moderate increase in gasoline costs, and other states are expected to endure a similar bump come February, when refiners switch to a more expensive grade of gasoline used during the summer months. But it is not clear when a massive price rise like the one experienced in 2008 might take place.

Another sub-sector of the so-called green economy involves water.

The Environmental Protection Agency says climate change and aging facilities promise to spread water shortages through most of the nation -- an issue that afflicts many parts of the globe. But there are companies attempting to develop efficient ways to desalinate ocean water to increase the supply. Other firms are working on recycling water for industrial use.

Another obvious area is transportation. Air pollution standards and consumer demand are pushing automobile companies toward making more low-emission or zero-emission cars, including hybrids and electric vehicles. If gasoline prices go up, demand for such vehicles can only rise. There are bicycle manufacturers, scooter makers, bus companies and others that hope to profit from continued concern about pollution and the price of oil.

No one can map out where next-generation vehicles are going, and that's just the start of the riddles green investors face.

Plenty of provocative but unproven ideas are out there, which means that potential shareholders should be extremely careful.

Firms that had plenty of money a year ago may have little left now, and analysts expect a winnowing process.

"Companies that aren't fully capitalized will probably have to shut their doors in late 2009, and a handful of players will come out much stronger," said analyst Sanjay Shrestha, who covers renewable energy for Lazard Capital Markets.

Shrestha advised investing in companies with a clear competitive edge, such as those whose products are most efficient.

Some advisors go so far as to recommend that investors stay away from individual stocks, investing instead in mutual funds with a proven track record in the sector.

If you want to take on the risks of investing in individual stocks, make sure the company is well capitalized, with enough financing to weather several slow years of operations. Doing so keeps your risk in check. Buying less-stable firms is so speculative that it can be akin to purchasing a lottery ticket.

Make sure the company is profitable, and check out the customer base. Read the risk factors in the prospectus for a sobering picture of what could go wrong.

One way to find funds that invest in green companies is to contact socially responsible investing organizations. The Social Investment Forum (, a financial industry association with an emphasis on ethical investments, puts out regular reports on the state of the industry. As of 2007, there were 260 mutual funds that marketed themselves as having been screened as socially or environmentally responsible investments.

But experts urge caution even when dealing with such professionals. A 2007 Consumer Reports survey showed that most socially responsible mutual funds had lower returns and higher expenses than their mainstream counterparts.

Doug Sandler, chief equity officer for Riverfront Investment Group, is waiting for household-name companies to sort the market out. He expects fledglings to give way to veterans with cash stockpiles, reliable manufacturing and global scale.

"Some of these smaller companies will plow the field," he said, "but when it comes time to harvest, the big companies will be the beneficiaries."




How some green funds did in '08

Here are some better-known exchange-traded funds that green investors use to broaden their exposure, including stakes in overseas companies. As their 2008 performances show, stocks in these industries can be volatile and risky.

PowerShares WilderHill Clean Energy Portfolio (PBW)

Closed at $8.62 a share

Dec. 31, down from $19.55

on June 30

Top holdings as of Oct. 31:

* Ener1 Inc.

* Raser Technologies Inc.

* Applied Materials Inc.

Market Vectors Global Alternative Energy ETF (GEX)

Closed at $23.35 a share

Dec. 31, down from $51.23

on June 30

Top holdings as of November:

* Vestas Wind Systems

* First Solar Inc.

* Verbund

Claymore/MAC Global Solar Energy Index ETF (TAN)

Closed at $8.77 a share

Dec. 31, down from $25.80

on June 30

Top holdings as of Dec. 31:

* First Solar Inc.

* Q-Cells

* Renewable Energy Corp.

First Trust Global Wind Energy ETF (FAN)

Closed at $12.52

a share Dec. 31, down from $28.90 on June 30

Top holdings as of Dec. 31:

* Vestas Wind Systems

* Iberdrola Renovables

* EDP Renovaveis

PowerShares Water Resources Portfolio (PHO)

Closed at $14.39

a share Dec. 31, down from $20.71 on June 30

Top holdings as of Dec. 31:

* Itron Inc.

* First Solar Inc.

* Veolia

Sources: Company websites, Yahoo Finance

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