Six Great Green Stocks
There's one good thing about high gasoline prices: Rising demand for energy coupled with global warming are finally forcing the world to get serious about conservation and alternative forms of energy.
No matter what your political views, you'll be able to make a lot of money in green-energy business opportunities in the coming years. I'm hardly the first investor to arrive at that conclusion, however. As a consequence, prices for many of the best green stocks zoomed up to nosebleed levels.
But many of these stocks have fallen sharply this year, so this may be a good time to invest in the group.
Consider First Solar (symbol FSLR). Demand has skyrocketed for polysilicon, a necessary ingredient in almost all solar panels. That puts First Solar, which has a patented process to produce solar panels from cadmium, a much cheaper material than polysilicon, in the catbird's seat.
Sales and profits are soaring. Analysts expect First Solar to earn $3.71 per share this year and $6.96 per share in 2009, according to Thomson Financial. "First Solar has developed into the undisputed cost-per-watt leader in the solar industry," says Morningstar analyst Stephen Simko. Analysts expect First Solar's earnings to grow at an annualized rate of 40% over the next three to five years.
First Solar predicts that it will achieve a major milestone in less than two years: The capacity to produce electricity for the same cost as other energy sources-without government subsidies. The company, says Matt Patsky, co-manager of Winslow Green Solutions (WGSLX), can "produce energy at less than half the cost of its cheapest competitor."
Shares of First Solar are hardly undiscovered. The stock went public at $20 in 2006 and closed at $258.74 on August 19. So it trades at 70 times estimated 2008 earnings and 37 times 2009 estimates. But the stock price is down from its all-time high of $317, set in May.
My two favorite green funds are likewise having rotten years. I think that makes this a good time to pick up some shares. Year-to-date through August 18, Winslow Green Growth (WGGFX) and Winslow Green Solutions are down 28% and 19%, respectively. They're both risky funds, suitable only for money you can afford to lose. But I think a small holding in one of these will pay off handsomely-so long as you hold on through the inevitably sharp ups and downs.
Green Growth has returned an annualized 8% over the past five years, putting it in the 51st percentile among small-growth funds -- almost smack dab in the middle of the category. Green Solutions launched late last year. I like it better than Green Growth because it is slightly more conservative, mainly because it buys stocks of slightly larger companies. It invests in midsize companies, as well as small companies. As its name implies, Green Solutions invests solely in companies working to improve the environment.
It's rare to find socially responsible managers who are first-class investors. Patsky, 45, co-manages both funds with Jack Robinson, 66. Both are savvy veterans. Not counting this year, Robinson has delivered 15% annualized returns on private accounts since 1994.
Rather buy some stocks? Patsky talked with me about a few of the managers' favorites. In addition to First Solar, they like Energy Conversion Devices (ENER), which builds solar cells right into its roofing materials, obviating the need for ugly, protruding solar panels. Analysts expect the company to earn 15 cents a share this year -- its first annual profit. Based on the August 19 close of $70.40, the stock's price-earnings ratio is a stratospheric 469. But earnings are expected to rise to more than $1.48 per share next year and to surge 35% annually in the coming three to five years.
Some of Patsky's picks are surprising. Take BorgWarner (BWA). This old-line auto-parts manufacturer recognized many years ago that cars would need to become more efficient. So the Auburn Hills, Mich., company began producing parts for engines that use less gas and fewer raw materials. Borg's top customers include Honda, Toyota and some European automakers. At $40.20, the stock trades at 14 times the $2.82 per share that analysts estimate Borg Warner will earn this year. Analysts see earnings growth of 17% annualized over the next three to five years.
Another decidedly unsexy stock is Lindsay Corp. (LNN). It makes central-pivot irrigation equipment -- the kind that makes those huge, green circular patterns you see when you look out the window as you fly over the western U.S. It's not new technology, but it conserves water, and Lindsay is the industry leader. Demand is growing partly because new farm legislation gives tax incentives for farmers to buy heavy equipment. The stock, which closed at $86.01, trades at 28 times estimated earnings of $3.05 per share for the fiscal year that ends in August 2008. Analysts see a big jump in earnings, to $4.01 per share, for the August 2009 year.
Sims Group Ltd. (SMS), based in Australia, is one of the world's largest recyclers. Soaring prices for commodities are boosting its fortunes, says Patsky. He notes that raw-material prices are so high that it's cheaper to make steel from recycled materials than to start from scratch with iron ore. Analysts estimate that the company will earn $2.14 per American depositary receipt this year and $2.68 in 2009. Based on a share price of $26.83, the stock's P/E is 13.
Madrid-based Telvent GIT, SA (TLVT) helps companies and governments save energy-and maintain safety. It designs, engineers and services real-time monitoring software for energy, environmental and transportation systems worldwide. A big seller in Europe is a system that automatically charges drivers in congested metropolitan areas different tolls based on the time of day they enter a city. Analysts estimate that the company will earn $1.94 per share this year, giving it a P/E of 12 based on a share price of $23.36. Earnings are expected to grow 18% annualized over the next three to five years.
Steven T. Goldberg (bio) is an investment adviser and freelance writer.