5 Green Stocks for a Bad Economy
Well-positioned survivors that are forging ahead in a gloomy market
Green investments mostly turned an unfortunate shade of red in 2008, and this year hardly looks better. Dried-up lending and slumping demand continue to hit the fledgling industry hard as investors flee from companies offering some of the most meaningful glimpses into a more sustainable future. Even after some devastating share-price drops, many are still struggling. With credit concerns at the fore, energy costs falling, and a broad aversion among investors to companies lacking in cash or a proven track record, it could be a lengthy road back. Right now, the industry is in a bit of a holding pattern, waiting to see how new tax and stimulus plans will play out against a backdrop of weaker customer demand. Here's a quick look at the current crop of well-positioned survivors, and a few smaller names still forging ahead.
Wind
To be blunt, there is a case against investing in the wind sector right now: credit markets. Building wind farms is a costly proposition, and if access to capital is tight there's very little reason to get excited about returning to the sector. "The financing market has really played havoc in the wind industry. There are good companies...but there are a lot of unknowns still," says Shez Bandukwala, a partner at ThinkEquity.
Vestas (VWDRY). Ahead of its February 11 earnings report, Vestas said the slowdown means demand has fallen off sharply. Citigroup recently predicted Vestas' sales would grow just 5 percent in 2009 before rebounding in 2010. But Vestas could be in for an Obama bump if the president's stimulus package includes a better mix of tax credits for wind. In anticipation, Jefferies recently backed its "buy" ratings on both Vestas and rival Gamesa on a hoped-for inclusion of new credit schemes and possibly new funding that could get some investors in wind projects off the fence.
Solar
The first half of the year could still include nasty surprises for solar, including an industrywide shakeout, as an oversupply of products meets declining demand. Traditional solar-panel makers are facing pricing pressure after a big run-up in production. But solar did win a victory with last year's extension of the investment tax credit (ITC), which could be worth $400 billion over the next eight years by some estimates. The ITC now covers 30 percent of a project's cost compared to a former $2,000 cap. The hope is the ITC will eventually spur demand as homeowners and businesses get serious about spending on solar technology (when that will be, of course, is another open question, as is the fate of a host of still-murky tax issues winding through Congress.
First Solar (FSLR). Of all the names in the solar space, First Solar may be the one almost everyone expects will survive this downturn. The company boasts a technological edge (it makes the industry's lowest-cost thin-film panel) and has one of the industry's better balance sheets. Also, down the road, First Solar's healthy cash flow will help keep it in the "acquirer" category in what analysts expect will be a substantial round of industry consolidation (though it won't start until financing recovers). First Solar has a "phenominal position," Bankduwala says. In the September quarter, cash flow from operations hit $140 million, up from a total of $205.5 million in all of 2007. S&P says First Solar is a "buy" with a $195 price target, and that even as the industry gets weaker, the firm's order book "seems more secure to us than most peers."
Smart Meters
Advanced metering infrastructure (AMI) is still among the best-positioned industries to benefit from any economic stimulus plan, and might just include the best performing names in the "green" sector this year. Capital spending plans are being reeled in throughout the utility sector, but upgrading the way we read meters and track energy consumption will be a long-term theme for both the industry and investors.
ESCO Technologies (ESE). The St. Louis-based company makes all sorts of gear that allows modern meters to communicate with utilities, in addition to other business lines including filtration. Grid upgrades are the key growth area for this company and competitors like Itron. In 2009, analysts say there's a good chance ESCO could enjoy some combination of a modest stimulus boost, revenue from contracts with utilities in New York and Toronto, and possibly new contracts with several major utilities. Keep an eye on SoCal Gas, for example. Deutsche Bank says ESCO has a 40 percent shot at winning that contract, or another with a large customer in Latin America. Deutsche Bank says ESCO has the best chance of outperforming the sector in 2009 and values the firm at $42 a share.
Utilities
Although utilities aren't often included in the "green" category, they'll play a huge role in deciding which energy-producing technologies make the most cash. Plus, in terrible bear markets, utilities are among the most defensive stocks around. Here's one that fits both the "safe" and "green" categories:
FPL Group (FPL). This Florida utility expects to grow its earnings by more than 10 percent a year through 2012--an ambitious goal it plans to accomplish alongside fast growth in its wind and solar operations. The company owns NextEra Energy, the largest wind and solar farm operator in the U.S., and while FPL could see some slowing along with those sectors, it has managed to move ahead even in this tough environment. In late 2008, FPL raised $1.3 billion in debt, with a $575 million chunk slated for the development of wind projects. BMO Capital Markets calls FPL a core utility holding with a price target of $60 a share.
Biofuels
Alternative fuels have undoubtedly been among the most damaged in this downturn. As oil prices slump, corn prices rise (that hurts ethanol), and the auto industry falls in on itself, the fuel segment of the green space is also in for a tough year. Now, ethanol companies like Verasun are selling off assets, and the industry looks moribund for at least the rest of 2009. Next-generation biofuels look promising, but most of those companies are still mostly still in the private sector. One exception:
Gushan Environmental (GU). First off, this is a microcap, an alternative fuel company, and a Chinese stock. Most investors would be hard-pressed to find a scarier trifecta in this market. That being said, David Kurzman, managing director of Kurzman CleanTech Research, says Gushan Environmental is still a good (if speculative) bet. The company makes biodiesel mainly from used cooking oil at five profitable plants throughout China (two more are on the way). The bet here, according to Kurzman, is that biodiesel in China will remain below the government-set cost of regular diesel, and with shares trading around $2, investors can buy Gushan near the cost of net cash. He sees shares rising to $7. "The basic idea is the stock is trading below cash. The real risk is China willl reduce diesel prices," he says.
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