Looking for attractive investment opportunities in a slow-growth or no-growth economy? The rapidly-expanding green solutions markets could be the place to find them, according to a new report from Winslow Management Company, a 27-year-old environmentally-focused investment firm based in Boston.
Winslow, which trademarked the term "green investing," recently grouped seven major environmental challenges with their corresponding solutions sectors: green buildings, water, sustainable energy, resource efficiency, sustainable living, green transportation and environmental services. It broke these sectors into 16 categories and-with input from more than 22 third-party academic, consulting and industry sources-extensively researched each to estimate their market size and projected annual revenue growth.
"We know these spaces well but wanted third-party verification ... I was surprised to see the aggressive growth rate (on average, a compelling 22%) in these categories," says Jack Robinson, Winslow's founder and chief investment officer.
"Green companies are no longer just young startups with entrepreneurs struggling to make payroll and spending more time raising money than building their businesses," notes Winslow's State of Green Investing Today report. In fact, each sustainability category-unlike most industries-is currently hiring employees, says Robinson.
"But just because you're green doesn't mean you're a good investment. You have to have a good business model and be well managed," he says. Here's a look at each sector and some of his favorite companies.
Growing consumer awareness and concerns about the cost and impact of fossil fuels is helping this sector, which includes green building construction (projected to grow 29% annually), green building retrofit (20% to 30%) and LED (light-emitting diode) lighting applications (31%). The administration's commitment to TARP (the Troubled Asset Relief Program) and tax credits through 2016 in geothermal and solar power are other sector plusses he sees.
Robinson, who notes that about a third of electricity produced in the U.S. is for lighting, expects increased movement towards LEDs, which last about 10 times longer than incandescent bulbs and use a fraction of their electricity. His top picks here are lighting product distributor Accuity Brands (NYSE: AYI); Cree, Inc. (NASDAQ: CREE), a leading innovator in semiconductor solutions used in LED applications; and Rubicon Technology (NASDAQ: RBCN), a maker of artificial sapphires critical in building substrates to make LEDs.
Robinson also likes Indiana-based WaterFurnace Renewable Energy, a pure-play in the growing geothermal space that is listed on the Toronto Stock Exchange (WFI). First quarter net sales rose 9% and it has ridden the downturn relatively well compared to its peers because of its big focus in the residential market. "It's 45% return on equity is envious and it has no debt. I wish I knew 10 companies like that," he says.
Overall the $464 billion global water industry, comprised mostly of regulated water utilities, faces projected single-digit growth. But growth of 20% and 40%, respectively, is expected for subcategories water management, solutions and treatment and water information technology. "There are attractive values in each," says Robinson, who notes the water sector saw a big market correction a couple of months ago.
His favorite, Nalco (NYSE: NLC), is transitioning under its new CEO from a cyclical chemical company to a water services company that'll help industrial companies clean their water before, during and after using it. One controversial aspect: A very small part of its business (less than 1%) makes dispersants, chemicals used to help clean up BP's Gulf of Mexico oil spill. "We don't view dispersants as green," he says.
Projected annual growth for natural and organic products, the focus of this $26.6 billion global sector, is 18%. This consumer nondiscretionary category "has soldiered through in good order," and is a bit pricey, says Robinson. But if you have a long time horizon, good companies, he says, include Chipolte Mexican Grill (NYSE: CMG) and Whole Foods Market (NASDAQ: WFMI), a pioneer in the sustainable living sector.