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Investing: Green technology has big growth potential

Buying stocks of companies that play a significant role in the environment and energy conservation can be highly speculative. Thinking long term, however, green investing makes some sense.

August 28, 2011|By Andrew Leckey

Taking advantage of greatly reduced stock prices is a tricky business. One strategy is to find an investment area so certain to grow that it will be around long after market traumas subside.

Green investing, which offers the added potential that innovative companies will get snapped up by bigger firms, could be one of those areas.

Buying stocks of firms that play a significant role in the environment and energy conservation can be highly speculative, as indicated by the beatings so many have taken this year. Fledgling green endeavors such as solar and wind also benefit from government subsidies that aren't guaranteed to last forever.

Thinking long term, however, green investing still makes some sense.

"We believe the clean technology trend is unstoppable," said Rafael Coven, managing partner for the San Francisco-based Cleantech Group. "There's a need for solutions because of the billions of people still coming onto the planet, the rate at which we're using natural resources, heightened global competition and factors such as drought."

Cleantech Group provides investment research and assists businesses in making strategic decisions. It selects about 70 of the top stocks for its Cleantech index from companies that derive at least 50% of revenues or profits from clean-technology businesses. The $112-million PowerShares Cleantech is an exchange-traded fund that uses that index to construct its portfolio.

"Green investing is broad-based in nature, but the two biggest components are power and fuel," said John Hardy, senior equity analyst with Gleacher & Co. in New York. "Within power, where I am mainly focused, there are subsectors such as solar, wind, thermal, smart-grid and metering."

Eric Wesoff, senior analyst for Greentech Media in San Francisco, says defining green investing is a "painful question" because everyone has his or her own definition. "Green investing encompasses clean chemical, clean materials and clean power or energy," he said. "That can be on the generation side, such as solar or wind, or on the demand side, in terms of making homes and businesses more energy efficient."

One company stock that Hardy and Wesoff agree has definite potential is Itron Inc., a firm that designs and manufactures products and software for automatic meter-reading and handheld computer-based meter-reading systems. That company, with 8,000 customers in 130 countries, also provides project management, installation and consulting services.

Itron's traditional metering business spins off considerable cash, so its balance sheet is cleaner than that of a fledgling company and carries less risk, Hardy said. It is a large, publicly traded company receiving a lift from the trend of increased information technology for utilities, added Wesoff.

"We pick companies for the Cleantech index from a few thousand that we could potentially choose from," Coven said. "However, we are losing companies fast to acquisitions as established companies look for growth opportunities, and that makes it difficult to find good replacements."

It is quite possible, he said, that in five years, there will be no more pure solar or wind businesses because they'll all have been acquired by larger companies seeking stronger growth.

Cleantech Group defines clean technology as knowledge-based products and services that add economic value by raising productivity and/or product performance, while minimizing the use of natural resources and impact on the environment and public health. Typical applications are in agriculture, energy, manufacturing, transportation, water and environmental quality.

Its Cleantech index has a wide range of stocks, from giants such as diversified global manufacturer Siemens and glass-and-ceramic technology leader Corning Inc. to smaller companies such as Kadant Inc., the world's leader in paper recycling technology.

"One of the things that investors have to consider is whether they are fond of government subsidies," cautioned Wesoff. "Most new energy sources like solar and wind benefit from government subsidies, and if you believe these subsidies will end, you might not want to get involved."

On the other hand, he said, you may believe subsidies are likely to continue, giving those industries a leg up that will enable them to reach parity with other sources such as coal and natural gas.

There are green investing stocks worth noting.

First Solar Inc., SunPower Corp. and MEMC Electronic Materials Inc. are solar-related companies developing their own pipelines of projects and improving their profit margins. A built-in advantage: Their bids on projects now will benefit from lower component prices in the future, noted Hardy.

First Solar has the largest project pipeline in North America; SunPower possesses industry-leading technology; and MEMC has made a strong financial comeback since near-bankruptcy a decade ago.

ESCO Technologies Inc., maker of filtration products and communication systems, is an established business generating cash, Hardy said. Its filtration products include depth filters, membrane-based microfiltration products and precision-screen filters. It markets internationally to the healthcare and transportation industries, among others.

Most green subsectors are high-growth and new, which means far more losers than winners, as was the case with carmakers in business during the 1920s, said Coven. His job is to find the winners.

"Big companies such as Wal-Mart Stores are putting millions of dollars into solar panels to help control the price of their energy," Wesoff summed up. "Companies make these investments because they find it is good business."

Andrew Leckey answers questions only through the column. Write to him at yourmoney@tribune.com.

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