Green Investing 101

By David Pierson and Edward Silver

Jan. 4, 2009 12 AM PT

These days, everybody’s an environmentalist. But as the new year begins, we ask whether in this dismal market it’s possible to safely invest in green companies and funds.

The call to “go green” seemed to be reaching a fever pitch just a few months ago.

Then-presidential candidate Barack Obama was pledging to promote industries that were environmentally minded and invest federal money in creating green technology. Americans, tired of shelling out more than $100 at the gas pump to fill their oversize vehicles, were turning to hybrids in droves.

This would all seem to benefit the scores of green companies that went public -- perhaps even creating a bubble like the dot-com and housing booms.

But the green wave has been volatile, returning profits over prolonged rallies during boom times but falling particularly hard in recent months.

In the second half of 2008, renewable-energy shares tanked.

The WilderHill Clean Energy Index, a collection of 51 green companies, ended the year down 70%, compared with a 34% drop in the Dow Jones industrial average.

The often undercapitalized start-ups became especially vulnerable after the stock market meltdown because there was no longer cash available to fund the hefty upfront costs for wind and solar projects.

On top of that, the price of fossil fuels plunged, restoring conventional energy’s status as the low-cost alternative -- costing investors lots of money. The Standard & Poor’s energy index lost 35.9% last year.

“It got a little bit frenzied like the tech bubble in ’98 and ‘99,” said Brent Kessel, co-founder of Abacus Wealth Management.

Venture capitalists backed projects that weren’t fully thought out, and investors rushed in too.

“Fundamental principles of investment weren’t being followed by those putting money into green companies and mutual funds,” Kessel said. “It was like they were interested in whatever was sexy. The story is always the same. The players just change.”

The old rules apply

So how does an investor navigate a sector so fraught with risk in the new year?

First, resurrect the old rules: Do your homework. Don’t invest money you can’t afford to lose, and don’t put all your money into any one sector.

For Kessel, careful green investing means buying shares in an array of companies that are turning a profit -- a seemingly basic requirement that was often ignored during the rush to acquire green shares.

Then, be patient.

These environmentally friendly companies may not make big money for a long time if at all -- a fact of life in the start-up world made more intense by the recession.

That’s because green products and services are often more expensive than their conventional counterparts, and during hard times, discretionary spending is usually the first to go. But to ignore their long-term potential is shortsighted, Kessel said.

Investments in alternative-energy companies, for example, probably won’t pay off immediately, but they might in five to eight years, he said.

Another key factor is the incoming Obama administration.

As environmental degradation continues, he and other world leaders will be under immense pressure to stem the damage. The plans that his administration lays out are likely to dominate the direction of the green movement.

Conservation and renewables will get another push in the form of public-works projects built into Obama’s stimulus package. China, a prolific polluter as well as a center for green tech, is also unveiling a stimulus package.

Throughout the economy, companies large and small are champing at the bit to advertise themselves as green -- and cash in on what many believe will be a revolution in energy, household products and other areas.

“The American consumer wants to be involved in it, and big companies are increasingly interested because they desperately need growth themselves,” said Jack Robinson, founder and president of Winslow Green Growth. The mutual fund was down 61.5% last year after gaining 23.5% in 2007, its fifth straight year of positive gains.

Another environmentally minded fund, Portfolio 21, declined 36% in 2008, also after enjoying five years of positive returns.

Think sub-sectors

The green sector is so new that it’s hard to even figure out what companies belong in it. Does Toyota Motor Corp., which makes SUVs along with hybrid cars? Does Whole Foods Market Inc., which sells organic foods but operates a huge supermarket chain?

It may be easier to break the sector down by company type.

The first and perhaps most obvious is energy. There are people developing sustainable fuels for cars and pushing to increase the amount of solar or wind energy that powers homes and businesses. That also extends to companies developing power cables to deliver that energy to urban centers.

Alternative-energy companies could receive a boost if fuel prices go back up, as could makers of hybrid cars. Californians are already experiencing a moderate increase in gasoline costs, and other states are expected to endure a similar bump come February, when refiners switch to a more expensive grade of gasoline used during the summer months. But it is not clear when a massive price rise like the one experienced in 2008 might take place.

Another sub-sector of the so-called green economy involves water.

The Environmental Protection Agency says climate change and aging facilities promise to spread water shortages through most of the nation -- an issue that afflicts many parts of the globe. But there are companies attempting to develop efficient ways to desalinate ocean water to increase the supply. Other firms are working on recycling water for industrial use.

Another obvious area is transportation. Air pollution standards and consumer demand are pushing automobile companies toward making more low-emission or zero-emission cars, including hybrids and electric vehicles. If gasoline prices go up, demand for such vehicles can only rise. There are bicycle manufacturers, scooter makers, bus companies and others that hope to profit from continued concern about pollution and the price of oil.

No one can map out where next-generation vehicles are going, and that’s just the start of the riddles green investors face.

Plenty of provocative but unproven ideas are out there, which means that potential shareholders should be extremely careful.

Firms that had plenty of money a year ago may have little left now, and analysts expect a winnowing process.

“Companies that aren’t fully capitalized will probably have to shut their doors in late 2009, and a handful of players will come out much stronger,” said analyst Sanjay Shrestha, who covers renewable energy for Lazard Capital Markets.

Shrestha advised investing in companies with a clear competitive edge, such as those whose products are most efficient.

Some advisors go so far as to recommend that investors stay away from individual stocks, investing instead in mutual funds with a proven track record in the sector.

If you want to take on the risks of investing in individual stocks, make sure the company is well capitalized, with enough financing to weather several slow years of operations. Doing so keeps your risk in check. Buying less-stable firms is so speculative that it can be akin to purchasing a lottery ticket.

Make sure the company is profitable, and check out the customer base. Read the risk factors in the prospectus for a sobering picture of what could go wrong.

One way to find funds that invest in green companies is to contact socially responsible investing organizations. The Social Investment Forum (www.socialinvest.org), a financial industry association with an emphasis on ethical investments, puts out regular reports on the state of the industry. As of 2007, there were 260 mutual funds that marketed themselves as having been screened as socially or environmentally responsible investments.

But experts urge caution even when dealing with such professionals. A 2007 Consumer Reports survey showed that most socially responsible mutual funds had lower returns and higher expenses than their mainstream counterparts.

Doug Sandler, chief equity officer for Riverfront Investment Group, is waiting for household-name companies to sort the market out. He expects fledglings to give way to veterans with cash stockpiles, reliable manufacturing and global scale.

“Some of these smaller companies will plow the field,” he said, “but when it comes time to harvest, the big companies will be the beneficiaries.”

david.pierson@latimes.com

edward.silver@latimes.com

(BEGIN TEXT OF INFOBOX)

How some green funds did in ’08

Here are some better-known exchange-traded funds that green investors use to broaden their exposure, including stakes in overseas companies. As their 2008 performances show, stocks in these industries can be volatile and risky.

PowerShares WilderHill Clean Energy Portfolio (PBW)

Closed at $8.62 a share

Dec. 31, down from $19.55

on June 30

Top holdings as of Oct. 31:

* Ener1 Inc.

* Raser Technologies Inc.

* Applied Materials Inc.

Market Vectors Global Alternative Energy ETF (GEX)

Closed at $23.35 a share

Dec. 31, down from $51.23

on June 30