"Green," "Sustainable," "Reusable," "Repurpose" - all commonly used words that encapsulate a growing worldwide mind-set. From TV spokespeople and editorial writers urging us to conserve energy to utilities and stores pushing CFL lamps to campaigns such as the University's dorm-wide green energy challenges, we are bombarded with messages that urge us to act in more environmentally conscious ways. Everyone knows that fossil fuels eventually will be exhausted and someday we'll all be driving electric vehicles and using sustainable solar, wind and hydro energy. The question becomes, should investors put money into "green" companies to capitalize on this burgeoning trend?
Certainly, some believe in the potential rewards, and there are a number of green funds one can invest in. One can also put money into a multitude of individual green companies that are publicly traded.
At first, green companies may seem like ideal investments - morally "correct" and economically promising. It is important to be somewhat cautious, however, when checking them out. Most "traditional" companies' fortunes usually are related to their current and expected levels of sales, profits and cash flow. Kodak, for example, was a leader in marketing film as well as cameras, but with the rise of digital cameras, demand for film declined. Sales slowed, the stock price fell and subsequent removal from the prestigious Dow Jones Industrial Average followed. Other companies experienced the reverse. Apple makes gadgets people love, generating lots of revenue and cash flow which is reflected in its rising stock price. Overall, the consumers (and companies) choose products to buy (or avoid) which in turn impacts the stock price of the company.
The trouble with many green companies is that they are unable to make products or services without significant government subsidies. Production, instead of being organically generated from market forces, is mainly supported by government intervention. The solar panel industry is a prime example of this phenomenon. Companies such as First Solar, the market leader in the production of solar panels, rely on countries such as Germany (economically powerful) and Italy and Spain (economically weak) subsidizing the solar panel industry. "Investing" in green companies such as First Solar resembles speculation in hopes that Germany will pass more legislation promoting green energy.
The question becomes, why does solar have to be subsidized? The reason is that solar is far less efficient at generating electricity than traditional fuels. A green econometrics blog reports that while gas and oil cost less than five cents per Kilowatt hour, the average cost of solar energy is about 37 cents per Kilowatt hour. Although solar energy someday may be cost effective, current price sensitivity does not yet justify its widespread use.
There are some green companies, however, that represent promising investments, and Covanta is one of those. Covanta is a company whose mission is to transform garbage and biomass into usable energy. The company is quite profitable as it is able to generate revenue in two ways: by charging a fee for processing the waste and also by selling the usable energy. Covanta also has a solid customer base: municipalities who need electricity. Also, net operating losses which were past losses now reduce the amount of taxes Covanta is required to pay. Although the price/earnings ratio and other similar valuation multiples may concern the value investor, the multiples are justified considering the expansion into international markets, particularly because of exciting growth in Asia and Europe.
Overall, green investment certainly can be incorporated into the typical investor's portfolio, but it is important to understand company and sector risk before investing.
Harrison's column runs biweekly Wednesdays. He can be reached at h.freund@cavalierdaily.com.
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