Stocks may be expensive now, but they won’t be forever. Five energy efficiency plays to buy when they’re cheap again in efficient HVAC, desalination, thermal imaging, and lighting.
Tom Konrad, Ph.D., CFA
This article continues my Clean Energy Stocks Shopping List series. In the first, I looked at five clean transport stocks I’ll be looking to buy when the market falls. In the second, I took a step back, and outlined why it makes sense to wait for better prices than to buy these companies now. Here are five stocks I’ll be looking to buy in my all time favorite sector, Energy Efficiency. Future articles in this series will be found here.
Much has been written about how energy and water are increasingly becoming interlinked problems, with the production of energy (especially biofuels) and the pumping, sanitization, and desalination of water requiring increasing amounts of energy. One way to invest in this theme is by investing in wind stocks or solar photovoltaic stocks, since these technologies require little or no water to generate electricity.
Another way would be to invest in water rights or water suppliers, or a water ETF. I have long avoided this method, because I consider water to be far too politically sensitive. People have a deep distaste of companies making money from water, and this often leads to politicians expropriating water company assets or changing the rules so that owners of water rights don’t make "unreasonable" profits from them. With all this political risk surrounding water, the only way I feel comfortable investing is through an equipment supplier which can make a profit by selling equipment to utilities. Once the sale is made, the profit can be booked, and there is much less ongoing political risk than there would be by investing directly in such a utility.
Energy Recovery, Inc. is such a company. They sell systems which greatly reduce the energy used in desalination, making this both an energy efficiency play and a water play. Better, they are currently profitable, and have an extremely strong balance sheet and good cash flow. However, its valuation ratios are all quite high because of high expected growth. I’m waiting for the price to fall before I buy any more (I’m currently short a few August $5 puts.)
I wrote about these two geothermal heat pump companies last December, and Waterfurnace is one of my Ten Clean Energy Stocks for 2009. Since I wrote those articles, Energy Secretary Chu toured a Waterfurnace plant, and announced $50 million in government support for geothermal heat pump use. Given all the attention, both stocks have risen sharply, and I’d be happy to increase my stakes if a market decline results in a buying opportunity.
I also recently covered Flir, which I expect to benefit from the growing number of energy auditors and energy audits which have been spurred by the stimulus package, and this stock, too, has advanced strongly. The business case remains strong, and if a market decline takes this high-growth, high P/E stock with it, I’ll be ready to buy more.
Cree is probably one of my longest standing favorite stocks. It is in both my Ten Clean Energy Stocks for 2008 as well as the 10 for 2009, and I was writing about investing in LED companies long before I started the annual lists. Because the stock price has gone up so quickly recently, I’ve sold most of my position. I went into some depth as to why I like the company in both articles, and I still like it and the LED industry in general, because it’s a rare energy efficiency play that’s a simple product, and hence does not encounter many of the barriers to energy efficiency. Reasonably high powered LED light bulbs are becoming more common in stores, as well as LED fixtures. I recently purchased an LED Lamp for reading, and an LED Grow Light. If a market decline provides the opportunity, I plan to rebuild my position in Cree.
DISCLOSURE: Tom Konrad and/or his clients own ERII, LXU, WFIFF, FLIR, and CREE.
DISCLAIMER: The information and trades provided here and in the comments 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.