Tom Konrad CFA
Although green stocks did better than un-green (or brown) stocks since Newsweek’s 2009 Green Rankings were published, the big winners were the greenest stocks in the brownest sectors.
Newsweek has released its 2010 Green Rankings for America’s 500 largest corporations, and the companies at the top of the list are happily gloating about being greener than their rivals. More important to investors is the question: Do the greenest companies beat the market?
Marc Gunther notes that the top 100 companies in the 2009 Green Rankings outperformed the S&P 500 by 6.8%.
My experience is similar. When last year’s rankings came out, I suggested that investors might not just gain by looking for out performance among the greenest companies, but “turning the list upside down” and looking for under performance among the least green (or brownest) companies at the bottom of the list. I picked five stocks that investors might short as a hedge for their other investments. They were: Peabody Energy (BTU), Consol Energy (CNX), ConAgra Foods (CAG), Bunge (BG), and Vulcan Materials (VMC). I highlighted Vulcan at the time as the stock I’d be most likely to short (I ended up shorting Peabody and Vulcan, although I’ve since closed out my Vulcan position.)
As a group, my short five picks ended up under performing the S&P 500 by 7.07% over the 13 months since I wrote that article. Vulcan Materials (the one I said at the time I’d be most likely to short) in particular was down 31.56% over the last 13 months, again suggesting that green companies have an edge over brown ones.
Correlation and Causation
Marc Gunther asked Cary Krosinsky of Trucost if the out performance of sustainable stocks is part of a more general trend. Trucost is one of the outfits Newsweek relies on to crunch the numbers behind the rankings. No surprise, Mr. Krosinsky thinks this year’s gains are part of a larger trend in which sustainability drives shareholder value.
While I agree with Mr. Krosinsky’s conclusion, I wonder if the out performance of Newsweek’s 100 greenest companies came because they are green, or because of some other factor. Two other possible factors come to mind.
First, although both Newsweek’s list and the S&P 500 are drawn from the largest American companies, the lists are not quite the same. One example I found was Boston Properties (BXP), which is in the S&P 500, but not in Newsweek’s Green Rankings. If the companies that are in the S&P but not in Newsweek’s’ list underperformed those companies in Newsweek’s Rankings but not in the S&P, that would explain the out performance. If we want to determine if Newsweek’s Green Rankings are relevant to performance, we should only compare Ranked companies with other Ranked companies.
Second, industry biases may go a long way to explaining the out performance of the most green companies over the brownest ones. The top echelon of the Green Rankings is stuffed with Technology companies (Eight of the top ten), while the bottom ranks are full of Basic Materials (3 of the bottom ten), Utilities (4/10), and Food and Beverage companies (3/10.) Perhaps the reason that the 100 top ranked companies outperformed the S&P 500 and my five shorts underperformed it was simply that Technology had a good year, or Basic Materials, Food and Beverage, and Utilities had a bad year.
If we want to know if green stocks (as measured by Newsweek) do better than brown stocks, we need to
- Only consider stocks ranked by Newsweek.
- Only compare stocks within sectors.
That is precisely what I did.
Comparing Green to Brown
Newsweek used fourteen different industry sectors: Banks and Insurance, Basic Materials, Consumer Products & Cars, Financial Services, Food and Beverage, General Industrials, Health Care, Industrial Goods, Media Travel & Leisure, Oil & Gas, Pharmaceuticals, Retail, Technology, Transport & Aerospace, and Utilities. In the table below, I’ve ranked how green the industry is by looking at the Newsweek rankings of the greenest and brownest companies in each industry. I also show the performance of the greenest and brownest companies in that industry from September 16, 2009 when the 2009 Green Rankings were published until October 21, 2010 when I compiled the table.
The amount by which the greenest company in each sector outperformed the brownest company is shown in the second-to-last column, labeled G-B. My sector-by-sector analysis does not show as much green out performance as we saw when just looking at the 100 greenest companies, or at my five picks to short, but it was still there.
The “Rank” column shows how green the sector is relative to other sectors. The lowest ranked sectors have the most companies with the lowest green rankings. This ranking of sectors leads to two surprises:
- Brown Sectors Outperformed Green Sectors. Although the greenest stocks outperformed the brownest stocks, the greenest sectors underperformed the browner sectors. The G+B/2 column shows the average performance of the greenest and brownest company in each sector. The twelve companies I looked at in the six greenest sectors lost, on average, 1% of their value, while the average change for all 30 stocks I looked at was +12%. The twelve companies in the six brownest sectors gained, on average, 14%.
- In green sectors, the brownest stocks outperformed the greenest stocks by a slight margin.
- In brown sectors, the greenest stocks strongly outperformed the brownest stocks.
Any of these trends may be one-off, but if we believe that sustainability makes a difference in stock performance, it begins to make sense that the differ
ence between stock performance would be greatest in the brownest sectors. In a brown or “dirty” sector, there is a lot of scope for a company to change its ways to reduce its environmental impact. On the other hand, the greenest sectors such as technology are inherently low-impact, and so there is much less scope for a company to differentiate itself by becoming more green to gain a competitive advantage.
A Long-Short Portfolio From the 2010 Green Rankings
Since the top of Newsweek’s rankings are dominated by the greenest companies from the greenest sectors, investors who just buy stocks from the top of the list are missing out on the most lucrative potential gains from green investing. These gains are to be had by investors who buy the greenest stocks in the brownest sectors and short the brownest stocks in those sectors.
In the 2010 list, the bottom of the list is again dominated by Basic Materials, Utilities, and Food and Beverage. I built a small long-short portfolio from the list by shorting the five lowest ranked companies (two each from Basic Materials and Food & Beverage) and one from Utilities, and buying equal numbers of the greenest companies in those same sectors.
Here is the list:
|Sector||Stock to Buy||Price 10/22/10||Stock to Short||Price 10/22/10|
|Basic Materials||Ecolab (ECL) # 26||$51.56||Peabody Energy (BTU) #500||$51.04|
|Food and Beverage||Coca-Cola Enterprises (CCE) #54||$24.63||Bunge (BG) #499||$61.74|
|Utilities||PG&E (PCG) #20||$47.66||Ameren (AEE) #498||$28.83|
|Food and Beverage||H. J Heinz (HNZ) #84||$49.55||Monsanto (MON) #497||$57.15|
|Basic Materials||Praxair (PX) #92||$92.18||Consol Energy (CNX) #496||$39.03|
Note that while all my green companies from brown sectors are among the 100 highest ranked firms, most are not even in the top 50. Of the top 100 ranked companies in 2010, only seven are from these three brownest sectors where, if 2009 returns are any guide, the greatest benefts of greenery are to be had.
Will 2011 be a repeat of 2010? I’ll take a look at these to see how the portfolio has done when Newsweek publishes the 2011 rankings.
DISCLOSURE: Short BTU.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.
NEWSWEEK—Isn’t that the magazine that recently sold for $1?
The entire company.
Yet another example of how great companies, great brands, and great investments are not the same thing.