Be mean when choosing 'green'

Saturday, 23rd January 2010 10:33 - by Riddler

When the equity markets rebounded in early 2009, many investors piled into the areas of the market which had been hit the hardest during 2007-2008. Amongst them were non-producing miners, smaller companies and ‘green’ stocks; found mainly on the AIM. However, as risk returned to the market, many of these stocks rebounded strongly apart from, in my opinion, the so called ‘green’ stocks. These included sectors such as renewable energy, waste and composting, fuel cells, carbon capture technology and many more. In fact, many of these stocks are still languishing at 2008 levels, and this might be explained in a number of ways. Many of the technologies have suffered from being commercially and economically unviable in terms of revenue growth. Solar stocks had a small renaissance in 2008, but have now plummeted to new lows, such as PVCS, SOLA, JHL and many more. In many cases it was due to the stock-piling of silicon wafers during the ‘lean’ years which impacted demand. Another reason may be linked to the price of oil. Many stocks were seen as attractive, economically and environmentally, when oil was $100-150 per barrel during the 2008 speculative and hype-fuelled Bull Run. Many stocks’ appeal was that they could produce energy cheaper and cleaner. ACTA, CFU and other fuel cell makers were seen as attractive at these levels, but their share prices seemed to follow the demise in oil prices. There are also huge amounts of ‘red tape’ bureaucracy and legislative hurdles to cross, also known as a ‘barrier to entry’. Therefore, stocks which use wind turbines, landfill sites, waste-to-energy sites and silo cage technology have to spend much of their time going through various rigorous planning stages, which are sometimes rejected, and which can appear to slow growth. You can probably add to this list, but I feel that the tide has turned and that savvy investors can turn their back on riskier small caps and instead invest in some soon-to-be defensive ‘green’ stocks which have good balance sheets, visible income streams, and are legislation-driven. There is also a growing commitment by G20 countries to reduce carbon footprints, whilst at a local level there is pressure on councils to reduce waste and to divert it away from landfill sites. Therefore, those stocks who survived the horrendous last 3 years could find themselves with few competitors in their sector, and enjoy having a ‘barrier to entry’ which puts them ahead of larger companies who wish to tap into this sector. My favourites, all held in my portfolio, are: TEG “Customers include local authorities, waste management companies, food processors, farmers and landowners. The Company's expanding market is driven by increasingly stringent EU and UK legislation regulating the treatment and disposal of organic waste. Statutory targets for the diversion of waste from landfill increase annually through to 2020, increasing TEG's market opportunity year on year. The Waste Resource Action Programme estimates that 450 composting plants will be needed by 2020 to satisfy local authority requirements alone, and there is increasing demand from the private sector driven by ABP legislation” TNCI “Tinci Holdings Ltd. is the parent company of Tinci Sanhe Environmental Engineering Co. Ltd., an environmental engineering company founded in October 2001, which is primarily involved in developing, manufacturing and installing flue gas desulphurisation (FGD) systems for reducing sulphur dioxide (SO2) emissions from coal-fired power stations and large industrial boilers in China” There are many more worth considering, such as MRG, GKO, PVCS, CFU and ACTA. There are still risks, but with many of these sectors having political, environmental and public support, it is worth delving deeper into which of these ‘green’ stocks have a clear forward-looking revenue stream...so be mean, not just green. London South East Limited does not provide financial advice, so Riddler’s views and opinions are all their own...however fantastic they may be!