Part 1: Introduction
In a financial world where there seems to be little hope, I see a bright spot in energy efficiency. This is because energy efficiency improvements pay for themselves in a very short time, in addition to being the best thing we can do for energy security and reducing greenhouse gas emissions. Given the current financial crisis, I also believe that investors should focus on companies with strong balance sheets, which will be able to internally fund their investment needs for the next couple years.
While I was making the above case, Energy Tech Stocks introduced their "Wise Energy Use" stock index, intended to "start every investor thinking about building a portfolio of companies whose fundamental business is to save their customers money by saving them energy." Since I have been thinking about just that, I thought it worth asking the question, "Which companies in the index might be able to thrive in times when funding is scarce?" Since there are fifteen companies in the Wise Energy Use index (nor was it intended as a formal index), this will not be an in-depth analysis of each, but rather more of a quick screen to find those which look ready to weather a continuing storm.
In general, using energy wisely is a good business to be in when times are are hard. When times are easy, conservation falls to a low priority, because the pennies saved will never add up to a big score. When times are hard, people stop thinking about the big score, and spend more time thinking about making ends meet. This should be great for companies whose business model is helping customers save money by saving energy, or Wise Energy Use.
In going through the list, I’ll be looking for companies with short term assets in excess of short term liabilities (i.e. a Current Ratio greater than 1) and, if cash from operations is negative, it should be small relative to cash on hand, as well as small relative to the difference between short term assets and short term liabilities. I’ll also take a look at how levered free cash flow compares to cash and current assets.
I’m also going to be more interested in companies which are not dependent on consumer demand, but rather will stand to benefit from infrastructure investment, which seems more likely to be a safe haven as governments everywhere attempt to get their economies going again.
Next week, I’ll go through the companies. If you want a preview, here are the EnergyTechStocks articles describing the companies: