When all else is equal, few people actively object to buying products touted as environmentally friendly. But buying stocks in so-called green companies may be a different story. Some of the newest companies have yet to prove that they can produce solid returns for investors.
However, as environmental issues gain greater attention from policymakers and the public, some companies think they can have it both ways by getting rich on environmentally-friendly products, or at least ones that don't do much harm. And investors have an ever-growing number of options.
With Earth Day approaching, Five for the Money takes a look at companies offering products or technologies that may reduce pollution -- and pull in big bucks in the bargain. They range from tiny startups to enormous conglomerates, and as always with new technologies, investors would be well advised to take a closer look before diving in, especially at those companies that haven't yet turned a profit.
1. Quantum Fuel Systems
Quantum's products include high capacity hydrogen storage tanks that can be used in fuel-cell powered cars. These tanks can store enough hydrogen to power a fuel-cell car for about 300 miles. Brion Tanous, managing director of equity research at Merriman Curhan Ford & Co. -- which makes a market for Quantum (QTWW
) -- says that's about the minimum distance electric cars will need to travel before consumers will buy them, and that makes Quantum an industry leader in a field that could take off. He rates the stock a buy despite predicting that losses will continue into at least 2007.
Only about 500 fuel-cell powered cars exist worldwide, but Tanous says there could be 5,000 in the U.S., and many more elsewhere, by 2010. What's more, the military is "very aggressively deploying hydrogen technology" to combat the expense and logistical difficulties involved in transporting liquid fuel in battle, he says. In the general arena, Quantum can already count among its customers behemoths such as General Motors (GM
) and Toyota Motor (TM
). Not a bad start in a fledgling market.
In March, the venerable glass and ceramics outfit said it had developed a new glass composite that doesn't include heavy metals in the manufacturing process. By reducing environmental hazards associated with the glass, commonly used on liquid crystal display televisions, the new formula enables Corning (GLW
) to gain an earth-friendly edge and reduces concerns over how the glass is disposed of.
They plan to adopt the technique over the next two to three years. The new method is "clearly a differentiator for them," says C.J. Muse, an analyst at Lehman Brothers (LEH
) who rates the company overweight. As attention in the glass sector turns away from size capacity to how the glass is made, Muse writes in a recent report that the new composition "support[s] the company's market share position and premium pricing over the competition."
Winchester (Va.)-based Trex (TWP
) sells a composite of reclaimed wood and plastics that can be used to build decks, fences, and other outdoor structures. It recycles materials that would otherwise go to waste.
Last year wasn't a great one for Trex. J. Keith Johnson, an analyst with Morgan Keegan, estimates that in 2005 the price of recycled polyethylene climbed about 40%, to around 30 cents a pound, cutting substantially into the company's margins, despite the fact that Trex boosted sales more than 15% year over year.
In early April, Johnson initiated coverage with an outperform rating, on the grounds that he expects higher product prices, improved efficiency, and continuing sales growth will improve Trex's profits. With about 88% of decks built on existing homes, Johnson doesn't estimate that a downturn in the housing market would have a drastic impact on Trex.
Are homeowners ready to give up wooden decks? Trex's material costs more than normal wood, Johnson says, but it's more durable and requires less maintenance. That means no staining -- and no paint fumes, easing another environmental concern -- and no splinters. For some, the tradeoff makes sense.
4. Capstone Turbine
) produces microturbines that can be used in parallel with utility power and heat or as a backup to it. Capable of running on fuels such as kerosene and natural gas, Capstone aims for its turbines to produce very clean emissions while helping clients save on the electricity bill. Capstone's turbines spin on high-pressure emissions from a fuel cell, reducing the need to use additional fuel.
Another small company, Capstone has sold more than 3,500 of the refrigerator-sized turbines in total. It isn't profitable but pulled in revenues of $16.55 million for the nine months ended Dec. 31, up about 43% year-over-year. A February report from First Albany Capital, which makes a market in Capstone, finds that the company has "reached an inflection point" that will boost orders. The firm rates the stock a buy, as Capstone continues to hum.
5. Medis Technologies
) produces portable alkaline fuel cells designed to power increasingly sophisticated and power-thirsty personal gadgets. The devices, scheduled for a limited retail release in the fourth quarter, provide sustained power without the need to use up excess electricity. Though they're disposable, the fuel cells don't contain heavy metals, unlike standard alkaline batteries. Despite these advantages, CEO Robert Lifton says the device was developed primarily with practicality, not ecology, in mind. "It's a product for people that happens to be environmentally O.K.," he says.
The device "creates power solutions where none exist" says Gary Giblen, director of research with Brean Murray, Carret & Co., which pursues investment-banking relationships with companies in its coverage universe. Rating the stock a strong buy, Giblen points out in a recent report that the device has "incredible" potential in China, where millions of possible cell-phone users don't have access to electricity to charge their phones.
Merriman Curhan's Tanous is more skeptical, rating Medis neutral. (The firm makes a market for Medis.) "It has yet to be determined whether a consumer would be willing to pay $20," for the charger, he says. And alternate approaches, like more powerful lithium-ion batteries, could also power gadgets. Another concern, Tanous says, is that the fuel cells contain sodium borohydride, which civil aviation authorities have so far not allowed for use on aircraft. That could ground the cells.
Obviously, there are some glitches in the drive to more environmentally friendly technologies. But the lure of profit -- and the chance to help the planet's ecosystem in the bargain -- may prompt investors to increasingly seek greener pastures.
NEXT WEEK: The flip side to our Earth-Friendly Five: Companies that are under the environmental gun from regulators and advocacy groups.