Green Investing

Submitted by bushidoka on Sat, 2010-05-08 12:33

I recently decided that I wanted to make some major changes to my RRSP, which I manage myself with a Scotia McLeod Direct Investing account. I've been dabbling in the stock market for about 10 years now, and fully managing my own investments for about the last 5 of those. And in general have done pretty well with it and beat the market average by a fair bit. Recently I decided that I should put my money where my mouth is, regarding green investing, so I went on the search for green investments. What I was primarily looking for was Canadian investments, which turned out to be a lot more challenging than I'd originally hoped because I had to limit myself to companies that were publicly traded on the stock markets - due to the nature of my Self-Directed RRSP with Scotia McLeod. But in the end, I did find some promising investments and shifted my money around accordingly.

One quick comment I have about investing in general, concerns the common advice you hear to "diversify your investments". There are actually 2 schools of thought on this matter, and I happen to adhere to the other school. Yes, diversified investments can help shield you from huge losses in one particular investment, but on the other hand they can also help shield you from huge gains in one particular investment. Let's just say for the sake of argument that a good diversified portfolio contains 20 different investments. And let's further suppose that one of those investments experiences huge gains, and doubles in value in a very short period of time. That's awesome! But given that it is only 1/20th of your entire portfolio, it will only produce a relatively small gain for you. This is why I personally generally keep my portfolio fairly small - sometimes with as few as 2 or 3 investments, but typically with 5 to 7. This may be considered higher risk, but it has served me well so far.

What is Green?

One thing I like about a self-directed account especially when it comes to green investing, is that I have the ultimate control over where my money goes. I get to decide what constitutes "green", because everyone has different views on that. Perhaps first a bit of discussion would be in order on this topic - what is a "green investment"? There is a huge range of things which could be grouped under this banner, but what I was looking for primarily was renewable energy, and in particular wind power. But here is a quick look at some of the other options which might be available to you, depending on what you are looking for. In addition to power generating companies, there are of course the companies which make the equipment for the generating companies. For example - who makes the wind turbines? I started out looking to invest in Daewoo, actually, because they recently decided to start building turbines in Trenton, NS, which is near my hometown. But what I found out was that they are not even publicly traded. In digging further, what I turned up was that most of the companies who make the turbines, only do so as a very small percentage of what their company does. For example, General Electric's power generating division makes up only about 10% of the company, and you have to buy stocks in the whole company - so arguably only about 10% of your investment would be "green". Also, if there is a huge upsurge in demand for wind turbines, given that that this division is only 10% of the company, the overall effect on the stock price might be minimal. That is not what I was looking for - I wanted as close to 100% exposure as possible. So I kept looking.

Some of the other things I turned up in my search, were a myriad of companies who make parts for turbines. And some of them looked pretty promising, as well - solid companies with good financial numbers and data behind them. But it was not easy to determine how much of their operations were tied up in the parts for turbines, and as already mentioned, I was looking for as close to 100% exposure as possible. I also came upon some "investment firms" which claim to invest 100% in "green technologies". This sort of company is a bit of a double-edged sword because on the one hand they can provide you a means to invest in smaller companies which are not directly traded on the stock market, but on the other hand you really have to do your due diligence to ensure the investment company is solid, because of the fact that they are not directly involved in the green industries they invest in. One example that jumps immediately to mind here is that here in Canada recently we saw the trainwreck in slow motion around former MP Rahim Jaffer, and the trouble he'd managed to get himself into. As it turned out, he was fronting exactly this sort of "green investment" company, and from everything that we've seen so far in the news it looked pretty shady, at best. But that is just my own assessment of the situation - nothing has been proven in court, of course.

A different sort of green investment might be Potash - something that has been pretty trendy lately. It can be considered "green" because it is a natural fertilizer, as opposed to the chemical fertilizers which are derived from fossil fuels. Potash is the substance mined from ancient seabeds below western Canada - millions of years old. It is the sediment from those ancient seabeds. Going off in a completely different direction, someone interested in high-tech might consider a company like VMWare to be a green investment, because their software allows companies to make huge savings in electricity in their datacenter. I can personally vouch for this fact, since I run a world-class datacenter in my day job, and power consumption is a major consideration for us. I have not yet moved my datacenter to VMWare, but I am looking very closely at it for this and other reasons. But I am not interested in this sort of high-tech investment for myself, so I did not go this route. Of course, this only touches the surface of some of the options that might be considered "green". One big investment I made recently was that I bought a good chunk of CP Rail, which I consider to be green because rail is the most energy-efficient way to transport goods.

Even when you get right down to renewable power generation, which is what I was looking for, you can get into quibbling about what is "green". Look at the huge hydroelectric projects in Quebec to see examples of massive environmental devastation these kind of projects can have. Even with smaller projects, power dams usually disrupt fish migration. Wind turbines, on the other hand, kill a lot of birds. This is why I like managing my own investments - because I get to make these decisions myself.

Another item often touted as "green" which I do not agree with, is ethanol production to be used as a fuel. Sure, it is renewable, but it also displaces valuable cropland, and in my view is therefore the antithesis of green. The last thing we need to be doing in my opinion is putting food into our gas tanks. Even some of the advanced ethanol production techniques like those of Iogen in Canada, which produces ethanol from cellulose fibre rather than directly from food crops like corn, is still not green. Its proponents tout it as taking "waste" and turning it into ethanol, but in fact this cellulose fibre is not waste at all. Green would be to compost it, and use that compost to fertilize crops. On the other hand, I do think there is some green merit to some aspects of biodiesel, as long as we are not growing crops directly to convert. Biodiesel technology can be very useful in taking spent fryer fat, for example, and turning it into useful diesel fuel.

One final thing that many consider "green" but I do not, is carbon-capture technology, so you will not find any of these companies below. The reason I do not consider this "green" is twofold - one, this usually involved pumping carbo n into the ground, and never seems to consider the potential hazardous effects of doing this. Believe it or not, there are lot of living organisms in the ground and especially in th e groundwater, and polluting their environment with carbon may be a death sentence for them. I would need to see this serious issue addressed before I could ever consider carbon-capture to be green. But more importantly is the second reason - and it is a very simple one - an ounce of prevention is worth a pound of cure. Let's work to avoid putting the carbon into the environment in the first place. Now that is green! In general I am not sold on carbon capture simply because carbon has already been captured by Mother Nature, and it is already stored in its optimal format - fossil fuels. It took her millions of years to accomplish this, and if we really want to be green, we'll leave the carbon exactly where she put it.

Search Methodology

Perhaps a few comments are also in order, on how I went about compiling the list below. I started out mainly with a few simple google searches on terms like "green investing" and "green power generation", and went from there. This got me links to a number of different online articles on the matter, which in some cases had links to specific companies and stock picks. Once you get one stock pick, you can put it into Google Finance and then Google will give you a list of related companies, some of which may or may not be the sort of thing you are looking for. But click on a few of those and check their related companies - and away you go. This takes time, of course, but it does eventually bear fruit. Google gives you a short blurb on what the company does, and that should be enough to at least tell you whether or not you want to dig any deeper on this company. Google also gives you a bunch of links to various news stories about the company, many of which will be analysts' opinions. When you decide you want to start digging deeper, that is when you need some solid financia l information about the company. You may have to go to their website for that, under the "investor relations section". If you already trade online, the company you use may have already compiled some useful information on each of the various companies traded on the stock market, so be sure to check there as well. I also have access to Recognia's Value Analyzer product, which does most of the technical analysis for you. If your online trading provider does not already give you access to this tool, you should contact them and ask for it, because it really is useful.

Value Investing

Since I've mentioned the Recognia Value Analzyer, I should say a few words on Value Investing. This falls under the very broad umbrella of "technical analysis", and in my own opinion a lot of the other stuff that falls under this umbrella is "hocus pocus". But Value Investing is in my opinion a pretty solid way to judge a stock. But if you do not trust me on the matter, perhaps you'd take Warren Buffet's word for it, since he is the most well known Value Investor. This basically involves using certain data about the company to judge whether or not the company is in good financial health, and whether or not its stock price is "fairly valued", "undervalued", or "over valued". What you ideally look for using this method, is companies whose data all line up properly, and whose stock price is considered "under valued". Most people who do their own investing, know what a company's "P/E" or "Price/Earnings" ratio is. If this ratio is equal to their growth rate, then the stock price is said to be "fairly valued". If growth is higher than the P/E, then it is undervalued. And if growth is lower than the P/E, then it is overvalued. Software like Recognia's will graph this for you over time to see the historical "value performance" of the stock.

But there is a lot more to value investing than just this. There are a number of other important data points that you need to look at, and good software will graph all these items for you, to make it easier to review them and decide. You want to see a graph with EPS (earnings per share) that is continually growing from the bottom left, to the top right over time. The steeper the curve, the better. Similarly, you want to see the Revenues curve doing exactly the same thing. And for both of these values, the straighter the line, the better. If the line is jagged, going up, and down, this is erratic and a sign of inconsistent performance. While a straight line is a sign of consistency, which is more attractive. Shares outstanding, you want to see doing the opposite - decreasing over time. If the number of shares outstanding is increasing over time, then the stock value is being diluted. However, if it is decreasing over time, this means the company is buying back its own stock, which in turn means they have tremendous amount of confidence in themselves. You also want to see a company with healthy dividends, which are ideally increasing over time. And have a look at their debt to equity ratio, which you ideally want to be decreasing (or non existent, for those rare companies with no debt). And finally, you want them to have a lot of "Cash and Equivalents" on hand - i.e. be rolling in dough ;-) Good software like Recognia's lets you view all of this data at a quick glance.

But this alone, of course, does not make for a stock worth buying. You have to know a bit about the company itself, its executives and leadership, its Board of Directors, the market it serves, its products, and its competitors. The value analysis only serves as a good first pass. You still have to do your homework.

Exchange Traded Funds (ETFs)

Just a quick word on these - have a look at Wikipedia for more in-depth info. An exchange traded fund is a financial instrument which trades like a stock, but does not represent a company as regular stocks do. It is actually a stock that tracks a group of other stocks, and you have to look at the details of the ETF to see exactly what it is they track. It is very similar in concept to a Mutual Fund, and is often considered a safe way to let someone else make your investment decisions for you, within a certain market segment. For example, in our context, we list below a number of green ETFs. You could also find ETFs for a wide range of market segments like automotive, manufacturing, mining, consumer goods, and so forth.

What I Found

Here is the full list of everything I came up with, including some of the links to analysts articles, as well as links to specific stocks. In some cases I include comments on the company or stock chart, while in other case I do not. In all cases, you should do your own due diligence! The decisions I made were right for me, but they may not be right for you. For one thing, I use emotion in my investment decisions, and most experts consider that a big no-no. Therefore, it should be obvious that I AM NOT AN EXPERT!!!

When I link to stocks, I use google finance because it is the best such free service I have found. With the google links, the exchange comes first, and then the stock symbol. I was mainly interested in finding Canadian stocks, even though the foreign-content limitations on RRSPs had been removed a few years ago by the Canadian Government, so technically I could have a very high percentage of foreign content if I wanted. But as I've already mentioned, I use emotion in my investing, and keeping it Canadian was one of my goals. If you are trading outside of your RRSP then there are no such limits anyway. One reason to remain in Canada, though, is to avoid the further complication of the exchange rate. That having been said, you will see a few foreign stocks below that I stumbled upon and though deserved mention. The main Canadian exchanges are the TSE (Toronto Stock Exchange) and the CVE (Canadian Ventures Exchange - former Vancouver Stock Exchange, and Canadian equivalent of the NASDAQ).

First I'll list the 3 stocks I bought : Brookfield Power Green Energy Fund (BRC.UN), Sea Breeze Power Corp (SBX), and Shear Wind Inc (SWX). The first one, Brookfield Power, is one of the "investment funds" that I talked about above, but it is a very well respected an d highly regarded one. This is a good choice for someone who basically wants to let someone else make their green investment decisions for them. But I also wanted to be more directly involved in individual companies, and was extremely interested in Window Power generation, and that is where the other two come in. They are probably higher risk than Brookfield, None of these three have been trading long enough for Recognia's Value Analyzer to be of any use to me, so I'm going it alone on this one.

http://www.google.ca/finance?q=CVE:SWX
100% Canadian wind power generation, but still very young. The stock price took a big jump just before the recession and then got dragged down into the mud with the recession. There was a fair bit of emotion involved in my decision to buy these guys, because I originally started my quest looking to buy a piece of the windmills that were being built in my home community of Pictou County, Nova Scoita, and as it turns out these guys are generating wind power in Pictou County, in the absoultely beautiful area of Merigomish. Their website says they have signed a 20 year agreement with Nova Scotia Power, which of course is a good thing speaking as an investor. I certainly did not do my due diligence with these guys, though. Given what I know about Pictou County, for example, I'd really like to know what kind of political manipulation might possibly be behind this company. A smarter investor might look into that sort of thing more closely than I have.

http://www.google.ca/finance?q=CVE:SBX
OK, I'll admit it that this was a 100% gamble on my part - just shooting craps here. I'm using nothing more than karma in my decision to buy these guys. After finding the wind generation company above in my home community in Nova Scotia, I came across this similar company in British Columbia, and figured it would be nice to have some wind generation on both coasts. I put a relatively small amount into them.

http://www.google.ca/finance?q=NYSE:KWT - US based ETF

http://www.google.ca/finance?q=NYSE:PBW
US based ETF or Exchange Traded Fund - index tracking fund. Tracks an index of 42 "Green" companies. Interesting that it dropped off a cliff with the recession, so if you believe we are pulling out of the recession now, this could be a good "safe" play for high returns in the 1-2 year timeframe.

http://www.google.ca/finance?q=TSE:POT
Potash Corp./Saskatchewan Inc, which has been extremely trendy the last few years. As the 5 year chart shows, it dropped off a cliff in the recession. This was probably a good thing because it really needed some cooling off. If you take the chart out to "max" you can see it may still be considered wildly overvalued, but this does not account for the fact that eco-savvy knowledge is coming into play these days. We know more about the devastation of the planet, and the fact that we are in trouble. Potash can in my opinion be considered a green investment because it is a natural fertilizer. Recognia's Value Analyzer lists it as currently "undervalued", and most of the other indicators are positive as well. Shares outstanding decreasing over time. Debt / equity ratio is fairly neutral - neither positive nor negative. High dividends. Lots of cash on hand.

A smattering of various foreign investments I came across, for anyone interested in getting some foreign exposure. I have not looked at any of these to any degree whatsoever, since I was only interested in Canadian investments. So do your own due diligence!

http://www.google.ca/finance?q=NASDAQ:DSTI

http://www.google.ca/finance?q=AMEX:GRH

http://www.google.ca/finance?q=NASDAQ:SPWRA

http://www.google.ca/finance?q=NASDAQ:ESLR

http://www.google.ca/finance?q=NYSE:LDK

http://www.google.ca/finance?q=NYSE:TSL

http://www.google.ca/finance?q=NASDAQ:CSIQ

http://www.google.ca/finance?q=TSE:XWE

http://www.google.ca/finance?q=OTC:NCEN

http://www.google.ca/finance?q=NASDAQ:QCLN

http://www.google.ca/finance?q=LON:JGC

http://www.google.ca/finance?q=AMEX:HTM

http://www.google.ca/finance?q=ASX:GER
Austrailian based 100% Geothermal company, for anyone interested in some international diversification. Your trading provider may or may not let you buy stocks on the ASX. The Recognia software does not have data for this company.

And back to Canada ...

http://www.google.ca/finance?q=CVE:GAE
A green investment firm that simply invests in other companies. I haven not looked at these guys in the least so have no idea how legitimate they are.

http://www.google.ca/finance?q=CVE:CEC
Canadian (BC) based company involved in both green energy as well as coal. It is not readily evident what the relative percentages are, of each. It seems to only be trading for a few years, so software analysis is useless at this point.

http://www.google.ca/finance?q=TSE:HE
Seems to be sort of a mixed-bag company that has green energy ( wind turbines ) as only a part of its operations, and traditional gas and oil filling out the rest. It is a Chinese company with operations mainly in China and Kazakstan, for anyone who wants some exposure over there. They have only been publicly traded for a couple of years which is not long enough for the Recognia Value Analyzer to be of any use in making a decision. I have a feeling based simply on the data on-hand that one could double their money on this one, inside of 24 months if not shorter. But personally I have no interest in investing in China so I'll pass. The blurb from Google Finance : "Hanwei Energy Services Corp. (Hanwei) manufactures and sells high pressure fiberglass reinforced (FRP) pipes for oil, gas and water transmission, wind power equipment, including turbines, FRP blades and towers, and FRP products used in flue gas desulphurization (FGD) processes in coal fired power plants. "

http://www.google.ca/finance?q=TSE:GTH
A US based Geothermal company. Too new for software analysis to be of any use.

http://www.google.ca/finance?q=TSE:ENF.UN
Fund with high % green power - though the rest of it is oil pipelines.

And a mish-mash of different things ...

http://www.google.ca/finance?q=OTC:AQUA
"OTC" stands for "Over the Counter" which means it is not traded on any market. But you should still be able to buy it online - I know I can within my Scotia McLeod Direct Investing account. Read the blurb within Google Finance to see what a niche market these guys have. It would be difficult to claim this is any real significant green technology or investment though it is green. I've included it mainly as an example of the wide range of things that can be considered green investments. The stock price has been trending towards zero over the last year, which may or may not be driven by the recession. The current price is below a penny, which makes it extremely high risk. However, if someone were in a gambling mood and wanted to play some penny stocks with the thought of the high potential returns that can sometimes come in that area, this might be a play to consider.

http://www.google.ca/finance?q=OTC:CICS ( carbon capture )

http://www.google.ca/finance?q=PINK:CRPWF Clipper Wind Power

http://www.google.ca/finance?q=kdn ( wind turbines )

http://www.google.ca/finance?q=NRDXF (german turbines)

http://www.google.ca/finance?q=tnb ( looks good in Recognia Value Analyzer )

http://www.google.ca/finance?q=awne

http://www.google.ca/finance?q=CVE:NKW

http://www.google.ca/finance?q=CVE:WND

http://www.google.ca/finance?q=TSE:BRC.UN

http://www.google.ca/finance?q=NYSE:FAN

http://www.google.ca/finance?q=NASDAQ:AMSC

http://www.google.ca/finance?q=CVE:SPC ( 100% canada green power )

http://www.google.ca/finance?q=CVE:SBX bingo!

http://www.google.ca/finance?q=CVE:ROR

http://www.google.ca/finance?q=TSE:SXI hydroelectric

http://www.google.ca/finance?q=TSE:INE
Seems to be a company which produces wind and hydro-electric power in Canada and the US. Have not really looked at them in any depth. They've not been traded long enough for Recognia's software to be of any use.

Some Articles

http://www.windenergyinvesting.com/category/canada/

http://googleblog.blogspot.com/2010/05/not-merely-tilting-at-windmills.html

http://www.investopedia.com/features/green-investing.aspx

http://www.canada.com/nationalpost/financialpost/story.html?id=29c62bbb-...

http://community.nasdaq.com/News/2010-04/tom-lydons-earth-day-guide-to-g...

http://www.selfdirectedinvestor.com/articles/?a=earthdayspecial.htm&b=20...

http://www.energybeta.com/renewableenergy/alternative-energy-etf/

http://www.advisor.ca/advisors/news/industrynews/article.jsp?content=201...

http://www.ecobusinesslinks.com/sustainable_investment_funds.htm

http://www.evolutionfund.ca/history.html

http://www.powerupcanada.ca/press/2009/01/press76/