Green Investing Can Make You Lots of Green

by Malcolm Katt
June 2008

Al Gore didn't invent the Internet, nor was he the first person to ask us to ''go green.'' Since the 1970s, when Americans lined up at the gas pumps, environmentally-friendly mutual funds have come and gone. They came to meet investor demand for environmental sensitivity; they failed due to poor performance and lack of investor interest. But just like recurring trends in the fashion industry, ''green investing'' is back and this time with belated purpose. There always seems to be no greater investor motivation than fear. Alternative forms of energy will be needed to meet global demand for years to come and government regulations dealing with the environment will have an impact on many businesses in many industries. Green market sectors, such as renewable energy, natural and organic products and recycling, are in vogue with the hottest market sectors of Biofuels, Fuel Cells, Genomics, Solar Cells and Wind Turbines are ready to explode.

According to Jackson Robison, the lead manager of the Winslow Green Growth Fund (WGGFX), which has generated a 22.95% annualized total return over the past five years (eight percentage points better than the Russell 2000 Growth Index), for every green problem there is a green solution. Green businesses don't create toxic waste, they don't have environmental liabilities, and they can reduce costs because they think about recycling (e.g., 99% of steel is recycled and similar trends are occurring in plastic, aluminum and glass).

Best-in-breed approach: Best-in-breed is to invest in companies with industry-leading environmental track records, such as Proctor & Gamble (PG) and 3M Company (MMM), which are among the greenest operators in their industries. This approach is followed by Green Century Equity Fund (GCEQX).

Clean companies: Those that have no negative environmental impact. Winslow Green Growth Fund invests in these companies.

Environmentally proactive: Firms active in the environment that produce goods or services linked to green initiatives such as alternative energy, energy efficiency, emissions reduction, water distribution and agriculture. Funds investing in this approach include Guinness Atkinson Alternative Energy Fund (GAAEX) and the exchange traded fund (ETF) PowerShares WilderHill Clean Energy Fund (PBW).

Some funds blend several styles, including Spectra Green Fund (SPEGX) and Portfolio 21 Fund (PORTX). The several-style funds are more likely to have greater flexibility in selecting winning stocks in a variety of market conditions. One of the most powerfully performing green mutual funds is PowerShares WilderHill Clean Energy Portfolio (PBW) which has earned nearly 16% since its inception in March 2005.

Buyer Beware

Just like with any investment there are risks with green mutual funds which you should not overlook. Many companies, especially in solar, wind and biofuels, are early stage firms. Look for funds with a strong management team that is familiar with managing a small-cap portfolio. Other risks to green funds include changing governmental regulation or subsidies and lack of diversification. For example many green ETFs focus on narrow niches such as Clayton S & P Water (CGW). Current valuations in some green sectors, especially solar and wind, is high and owning green funds is not cheap. For most green ETFs, expenses range from .50% to .75%, which is higher than their non-green counterparts. Green mutual funds are also expensive. The Calvert Alternative Energy Fund (CGAEX) has a 1.85% expense ratio.

Not all green mutual funds appeal to all investors. For instance, you may be turned off by those that invest in nuclear power companies or own companies with human rights issues. Do your homework before investing by reading the fund's prospectus and/or getting some research from your broker or finding information online.

Green investing can make you money, but to do so, avoid the hype and have a long-term view. Pay attention to the latest trends. A good place to start is going to Green Money Journal (www.greenmoney.org). A newly-released book on the topic is Green Investing: A Guide to Making Money through Environment Friendly Stocks by Jack Uldrich.

For those investors that want to buy green stocks rather than green funds, here are green stock recommendations:

LSB Industries (LXU)  - www.lsb-okc.com
Manufactures heat pumps and chemicals products
Market Cap: $506.10 million
Price-to-Earnings Ratio (trailing 12 months-ttm): 13.35
Earnings per Share (ttm): $1.82

First Solar (FSLR) - www.firstsolar.com
Solar-panel maker
Market Cap: $16.35 billion
P/E (ttm): 102.32
EPS (ttm): $2.03

EnerNOC (ENOC) - www.enernoc.com
Products help utilities and electric grid operators regulate supply and demand
Market Cap: $281.58 million
P/E (ttm): N/A
EPS (ttm):-1.99
EPS (ttm): 2.13

WFI Industries (WFILF) – www.wfiglobal.com
Operates in geothermal equipment manufacturing and loop installation services
Market Cap: $306.42 million
P/E (ttm): 35.30
EPS (ttm): $0.72
EPS (ttm): $0.72

U.S. Geothermal (UGTH) - www.usgeothermal.com
Renewable energy development company
Market Cap: $174.14 million
P/E (ttm): N/A
EPS (ttm): $-0.06

Honorable Mentions

Pacific Ethanol (PEIX) (www.pacificethanol.net)
Leading producer of low-carbon renewable fuels.

Suntech Power  (STP) (www.suntech-power.com)
One of the world's leading solar power companies.

aQuantive (AQNT) (www.aquantive.com)
This paperless online marketing company has enjoyed annual returns of $24% since 2005.

Socially Responsible Investing

Green investing is a segment of socially responsible investing (SRI) which means investors can put their money to work by creating a world that reflects their ''socially responsible'' values of protecting the world we live in.

SRI excludes certain industries, such as alcohol, tobacco, nuclear power, and gambling. SRI looks for industries with positive characteristics, such as fostering diversity in the workplace, environmental responsibility, favorable labor practices, and offering goods or services that benefit society.

A good SRI fund should pick companies with fewer long-term liabilities such as the risk of litigation, increased regulation, or environmental degradation that can affect the company. Certainly, green investment funds meet these objectives.

During the last few years, financial institutions including venture capitalists, hedge funds, investment banks and public pension funds have invested billions of dollars in green products such as ethanol, fuel cells, green chemistry and environmentally friendly pesticides. Investors have also decided that green investment funds and green stocks can make money in addition to being environmentally responsible.

The Social Investment Forum website offers comprehensive information, contacts and resources on socially responsible investing and can be found at www.socialinvest.org.

Conclusion

Opportunities for green investing abound while research and development efforts are equally flourishing. Unlike Nanotechnology, viable business models exist today with real, shippable products and services. Many of the investment opportunities mentioned in this article are profitable and expected to be profitable for years to come as traditional energy sources continue to diminish. The likelihood of future demand is anticipated to be brisk. For these reasons, every investor should diligently evaluate green investment opportunities, today.