5 'Blue Economy' Stocks and Funds
If you haven't heard of the "blue economy," it's time to familiarize yourself ... and consider some of the investments within this ecosystem.
Blue economy isn’t a household term – one investing expert told us he had to search for it on the internet when we asked about it recently. But it’s getting a growing amount of attention.
What is it? The blue economy represents all of the dollars spent to improve the economic growth, health and livelihood of ocean and coastal zone ecosystems. The reason it matters: The ocean constitutes 70% of the world’s surface. “You can’t have a healthy planet without a healthy ocean,” says Louise Heaps, the head of sustainable blue economy at the global nonprofit WWF, in London. (In the U.S., this group is known as the World Wildlife Fund.)
The problem is, finding good ways to invest in improving the health of the ocean is not easy. Conservancy groups and non-profits dominate ocean cleanup efforts. You can donate money to them, but you can’t invest in them.
Even finding a fund that focuses on solving water-scarcity issues or decontaminating waterways, for example, is hard. Many water-focused funds are filled with utilities and related infrastructure companies without a stated focus on conservation.
“The funds roll up all the companies that have something to do with water, and that’s their index,” says Katherine Collins, head of sustainable investing at Putnam. “It’s not really satisfying.”
There’s some hope, though, in the form of these five “blue economy” investments. We recommend two funds that focus on water sustainability. We also found the stocks of three companies doing interesting things that will help us use water more efficiently or that go some way toward stemming water pollution.
Every bit helps to foster sustainability.
Tetra Tech
Tetra Tech (TTEK, $148) is an engineering and consulting firm has big roles in many sustainable areas, including water management.
For instance, the company helped a Kentucky sewer system authority save $200 million from 2006 to date by building a high-tech, real-time system to monitor and manage sewer system overflow during periods of heavy rain.
And in Los Angeles, Tetra designed a smart cistern system that can predict how much rain will fall, estimate a cistern's current capacity and then release water at just the right time to underground aquifers, which provide the city's local water supply.
Stifel analyst Noelle Dilts recommends the blue economy stock.
"We believe the company is well positioned to benefit from strong secular drivers in water and environmental services, with 85% [or more] of revenues tied to these markets," she says.
Analysts expect the company, $8.0 billion in market value, to deliver annual earnings growth of 9% in 2022 and 8% in 2023.
Tetra's shares are down 22% from 2021 highs, but they're still trading at 36 times year-ahead earnings estimates. Dilts believes the stock can command an even higher P/E. She has a 12-month price target on the shares of $200, based on a price-earnings multiple of 44 on her estimate of earnings in 2023.
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Danimer Scientific
Pollution harms the health of ocean wildlife and habitats, which can hurt coastal economies. In particular, "plastic is a killer of ocean life," says Vicki Benjamin, a comanager of Karner Blue Biodiversity Impact Fund (KAIBX).
Indeed, the ocean is home to five plastic islands of floating trash; one is roughly twice the size of Texas. Danimer Scientific (DNMR, $4) could help reduce that. It is developing a kind of plastic that is 100% biodegradable and compostable.
The blue economy company is another newcomer to the stock market; it had its initial public offering in December 2020. The company has a $409 million market value, no profits and just $53 million in revenue over the past 12 months.
It's one to watch for now. Jeffries analyst Laurence Alexander rates the stock a Buy, saying that 2022 should be a "validation year," when leading brands adopt its plastic. It already has a number of well-known customers, including PepsiCo (PEP) and Walmart (WMT).
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Deere
Excessive use of fertilizer can run off into waterways, harming plants, animals and habitats, not to mention water quality.
"If we could just reduce the use of fertilizer, that would have the biggest positive impact on water," says Putnam's Collins.
Deere's (DE, $369) "See & Spray Select" technology, installed on a fertilizer sprayer, uses camera technology to identify color differentiation in the field so that only weeds get sprayed with herbicides. The system reduces herbicide use by 77%, on average.
As a giant in agricultural equipment, Deere has its share of eco-bugaboos, but it’s a leader in precision agriculture – technology that helps increase crop yields and minimize the use of fertilizers, two key environmental pluses.
The company spends $4 million a day on research and development, with an emphasis on precise automated machines. In January, Deere unveiled an autonomous tractor that should lead to more efficient planting and better harvests.
At current prices, Deere stock trades at 17 times earnings expectations for the year ahead and has a market value of $114 billion. Analysts expect 11% growth in earnings in its 2022 fiscal year, which ends in October, and 18% in fiscal 2023.
Credit Suisse's Jamie Cook rates the stock Outperform.
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Fidelity Water Sustainability Fund
Fidelity Water Sustainability Fund (FLOWX, $15, expense ratio 1.00%), a new, actively managed fund, focuses on firms working on solving the world's water crisis. That includes software and data analytics that help deliver easier and more reliable access to clean water.
Industrial machinery is the fund's top industry weighting at a quarter of assets. It's followed by water utilities (17%) and electronic equipment and instruments (15%), as well as 11% of assets each in building products and industrial conglomerates.
Roper Technologies (ROP) and American Water Works (AWK) are top holdings.
FLOWX has returned 7.9% over the past 12 months.
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Invesco Water Resources ETF
Invesco has three water-focused exchange-traded funds (ETFs), but we favor Invesco Water Resources ETF (PHO, $52, 0.60%) because it tracks a Nasdaq index that includes companies creating products designed to conserve and purify water.
PHO is similar to FLOWX in that its largest asset concentrations are in machinery (27%) and water utilities (20%). However, it also has a substantial 16% invested in life sciences tools and services.
Waters Corp. (WAT) and American Water Works top the portfolio. The fund has gained 9.4% over the past 12 months.
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