Green Stock Picks

Original Green Living Online link: http://www.greenlivingonline.com/sites/default/files/GL_MAC_Socially_Responsible_Investing.pdf

If you’ve ever opened an account with a brokerage you know that investing in stocks is a challenge. If it weren’t, there wouldn’t be such a huge industry in investment advice or in mutual funds.

Buying stocks in early 2011 is also complicated by the fact that the S&P/TSX Composite is up more than 65% since early 2009. Bullish market watchers see room for continued growth, but the market can’t remain on its current trajectory forever.

Still, there are good reasons to consider stocks—especially if you’re an educated investor looking to build an environmentally and socially responsible portfolio. You’ll still need to be pretty good at picking stocks but—the big key—you’ll have free rein to tailor your holdings to your values and responsibility standards.

How much does this matter? A lot, says Alan Harman, a director at ScotiaMcLeod and a veteran investment adviser in the socially responsible field. Say you’re an investor who has decided you’d like to target your investments towards alternative energy. If you buy a generic Canadian Socially Responsible fund, you’ll have to be prepared to own shares in Suncor, a big player in the oilsands. “Suncor will be in pretty much every portfolio because they always rank very high on the SRI indices,” says Harman. “But if you’ve got strong negative opinion on the oilsands, you’re not going to want to buy Suncor. The nice thing about buying individual stocks is that you can decide that.

Where to begin?

Harman, who does advisory work for small not-forprofits and church organizations, says he approves of several large technology companies. “One of my favourite examples of the last couple of years is Google,” says Harman. “It’s a stock that doesn’t always make it into a lot of standard portfolios because it’s always considered risky, on a number different metrics it’s considered expensive. Yet it’s the perfect example of a company that has done all kinds of things right, and where, I think, their social responsibility, their good corporate citizenship has also added to the bottom line. I think that they’ve attracted talent because oftheir good corporate citizenship and retained talent for the same reason. We’ve always had a fair bit of Apple for similar reasons.”

Harman also buys a lot of Canadian stocks. As an adviser, he balances his fiduciary responsibilities to his clients with his preferences for the most socially responsible companies. In our domestic market, that means he avoids gold companies and shops lightly from the resource sector. Companies in those sectors appear in many pre-packaged socially responsible portfolios, but their environmental practices make him uncomfortable. Instead, Harman sticks mainly to the big banks in finance, large telecoms and other larger firms that offer tangential exposure to the strong resource and commodities markets. “There are some companies that do a lot of really great things—I think Scotiabank, quite frankly, is one of them. And I think that [having that SRI credibility] helps, certainly in our international jurisdictions, it helps our attractiveness to potential clients and therefore our profitability.”

Individuals less constrained

Investors picking their own stocks aren’t quite so constrained. A good place to start looking for socially responsible candidates is Maclean’s Jantzi-Sustainalytics’ ranking of Canada’s most socially responsible companies. It weighs a wide range of environmental, social and governance factors to come up with the ranking. The big five banks—BMO, TD, RBC, Scotia and CIBC—are all on the list.

Suncor, as Harman noted, is also a standout on the ranking. But if an investor is interested in alternative energy and cleantech and would rather steer clear of the oilsands, the Jantzi ranking also includes Westport Innovations (TSX:WPT-T), a smaller yet well-established company with technologies that enable diesel engines to run on cleaner fuels like natural gas and biomethane. Harman acknowledges that Westport’s products are good for the environment, but he says its small size makes it a challenge for the more conservative investor. Nevertheless, as of mid-April 2011, Westport shares were trading in the $20-$26 range, a significant increase from lows of between $4 and $6 in the aftermath of the 2008-2009 market crash. Where Westport’s shares might be headed in the coming year is tougher to predict. Investment analysts who rate the stock are evenly divided—some have it listed as a “strong buy” while others have it pegged as a “sell.”

Strong post-crash stock performance is a trait of most of the companies on the Jantzi list—yet for many, share price growth has leveled off. However, if we take the analysis a step further and crosscheck the Jantzi list against a summary of analyst recommendations, the following firms show the strongest buy recommendations: Cascades, Gildan Activewear, TD Bank, Loblaw and Brookfield Properties.

Sector shopping

As long as you maintain a diversified portfolio overall, it never hurts to invest in companies in hot sector; if the sector has staying power, even better. We asked Timothy Nash, a Toronto based sustainable investing consultant and president of Strategic Sustainable Investment, what sector looks good today. His answer: energy efficiency. “Buildings and electricity grids are
getting smarter,” says Nash. “As we identify and eliminate waste, the financial and environmental benefits are obvious.” It is, he says, “truly the ‘low hanging fruit’ of the green transition.”

He singles out three companies in this space: Schneider Electric SA (Euronext:SU); EnerNOC (NASDAQ:ENOC); and Johnson Controls (NYSE:JCI).

Schneider is a global leader in energy management systems, says Nash. They provide the hardware and software that buildings need to track and automate the use of energy, water and heat. Just by measuring real-time use and eliminating obvious waste, facilities can easily reduce energy consumption by 20% to 30%, which becomes even more attractive as energy prices rise.

EnerNOC specializes in ‘demand response,’ which levels out the peaks and valleys of energy demand over the course of a day. As Nash says, energy is now more expensive at certain times (when demand is high), so facilities can save lots of money by being smarter about when they use it. This technology also helps the environment, as utilities will often turn to dirtier
sources of energy when demand peaks.

Johnson Controls, meanwhile, makes equipment and components, from HVAC systems to refrigeration, for green buildings. Nash also likes that the company’s diversified: it also supplies batteries for hybrid and electric cars.

What the experts like

Another place to look for potential stocks to buy is in the holdings of good, independently managed SRI funds. Elsewhere in this report, Nash singles out Greenchip Global Equity Fund, run by Greenchip Finanacial, sister company of Investeco Capital in Toronto. (Full disclosure: Investeco and Green Living Enterprises have a common owner). So we encouraged Greg Payne, Greenchip Fund’s manager, to tellus about some of his favourite companies in the fund. Payne cited these eight:

Pure Technologies (TSX-V:PUR) provides advanced technologies for the inspection, assessment, monitoring and management of critical infrastructure including bridges and water pipelinesuses, ultimately saving money and water. Its revenue has grown from less than $10 million in 2006 to more than $40 million in 2010. Much of its customer base is in the U.S. and Africa, serving both customers with aging infrastructure, as well as new developments in which Pure’s technology can be incorporated from the outset. “They’ve carved out a unique niche,” Payne says. “Technologically, they seem to be one step ahead.”

New Flyer Industries (TSX:NFI.UN) is a leading manufacturer of alternative energy buses for urban transit fleets. A recent management change has improved its operating margins, notes Payne. He also believes the long-term future is bright given the inevitably greater emphasis we’ll see in cities on public transit in a lower-carbon-consuming future.

Ram Power (TSX:RPG) is an emerging player in the supply of utility-scale geothermal power—extracting steam and hot water from deep in the earth to drive turbines and supply electricity. It has a major, 82-megawatt project coming online next year in Nicaragua. This and other developments, Payne says, make its shares “pretty attractive.”

Newalta (TSX:NAL) is a Canadian provider of waste processing and recycling services to the materials industry. It is a leader in handling waste and process water from the oil industry, with the double benefit of cleaning up and recovering valuable oil.

Biox (TSX:BX) is a Oakville, Ont.-based producer of biodiesel that uses a flexible process that can switch input sources according to that which affords the best margins. It handles everything from yellow grease and beef tallow to more traditional inputs such as soy or palm oil.

Itron (Nasdaq:ITRI) is a global leader in utility metering, providing meters in the U.S. and internationally to monitor electricity, gas, and water consumption. Its “OpenWay” technology is at the forefront of smart meters, with recent large contract installations in California.

International Rectifier (NYSE:IRF) makes power management semiconductors that help electronic devices and machines manage and improve the efficiency of their power consumption.

RuggedCom (TSX:RCM) specializes in rugged communication technology (routers and switches) that can withstand the extreme climate and electrical environment in electrical substations and enable utilities to remotely monitor the performance of their equipment.

The opportunities in these kinds of companies and sectors also get a strong endorsement from Nicholas Parker, chairman and co-founder of the Cleantech Group. Ideally, Parkers tells investors to look for areas of convergence, what he calls “nexustech.” This refers to such things as products/companies with solutions that simultaneously meet energy-food-water challenges. “An illustration would be an energy-efficient water pump for agriculture,” he says. Or, “a home automation system that provides security, entertainment and energy management.”

Tom Rand, an engineer, investor who heads the Cleantech and Physical Science Venture Group at the MaRS Centre in Toronto and author of Kick the Fossil Fuel Habit: 10 Clean Technologies to Save Our World, also sees the emerging low-carbon economy holding the most opportunity. “That includes smart grid, renewable energy, energy efficiency and clean transportation,” says Rand. “Any technology that can reduce fossil fuel use will become more and more valuable.”

Take a long view

Just as that’s a long list of companies, issues and strategies to digest, Timothy Nash cautions investors in environmental and socially responsible sectors to keep the longer-term horizon in mind at all times. “Investors in green sectors should understand that it can be volatile,” says Nash.

At the same time, he stresses that every investor should be looking at these sectors—not just environmentally conscious investors. “Every one should have at least some exposure,” says Nash. “Or they risk losing out on the next big boom.”

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