Make a profit, save the world

Even if you don't buy into theories on global warming, alternative-energy industries should prosper in the coming years. Now's the time to invest.
By Jim Jubak

You should own global-warming stocks. Even if you think that global warming is based on bad statistics and unconvincing computer models. Or that it's a plot by the tree huggers and the United Nations to institute some kind of world government.

I'm not one of the skeptics. I find the science compelling. Human activities ranging from burning coal for electricity to driving gasoline-fueled vehicles have increased levels of carbon dioxide in the atmosphere. These changes are about to shift the world's climate into a new state that will dramatically alter rainfall patterns, ocean currents, sea levels and the acidity of the world's oceans. And we've got only a relatively small window, maybe as few as 50 years, before these changes to global climate take on an irreversible momentum.

I'm not here to argue the science. There are lots of books that do a good job of that. My current favorite is Tim Flannery's "The Weather Makers." I accept your skepticism. Doubters and scoffers welcome.

So let's say you don't buy it. I still think you ought to invest in global-warming stocks. At worst, you'll make a profit. At best, you'll make a profit and help save the world. That sound OK to you? Then let me explain my logic. At the end of this column, I'll give you five kinds of global-warming stocks to consider for your portfolio.

Not just an environmental issue

The deck is stacked at the moment in favor of action on global warming. Even if global warming winds up on the rubbish heap of discredited scientific theories, entities such as the European Union, Japan, China, India and even the United States are going to adopt a program that looks a whole lot like one designed to stop global warming because it fits each nation's need to increase its energy security as well. It's not just coincidence that politicians on both sides of the Atlantic are talking simultaneously about stopping global warming and ending their nations' addiction to oil.

This program of action, whether under the guise of national security or stopping global warming, couldn't come at a better time for what I'll have to call alternative-energy stocks, for lack of a better term. The subsidies and market incentives in this program will be more than enough to push maturing, but still not fully commercialized, technologies into the market on an equal footing with other energy technologies.

Come what may after that, these alternative-energy technologies -- and I'm thinking here primarily, though not exclusively, of wind and solar power -- will have received enough of a boost to be able to compete with the rest of the energy sector.

You can get a good sense of what the coming global-warming combat orders are going to look like from the plan unveiled Jan. 10 by the European Union.

The plan calls for:

• Making a 20% reduction, from 1990 levels, in carbon emissions in the European Union by 2020.
• Getting 20% of electricity supply in the European Union from renewable sources by 2020. That's more than a doubling from current targets.
• Constructing a new generation of safer nuclear reactors to keep nuclear power at a 30% share of supply.
• Keeping coal at 30% of electricity supply but ensuring that all new and existing plants include systems for capturing carbon and storing it out of the atmosphere.
• Having biofuels provide 10% of fuel for transportation by 2020, up from 2% now.

Global warming or no global warming, it's pretty clear that these changes are critical for the future health of the European economy. Europe is desperately worried about its reliance on Russian energy supplies. In the most recent example to Europeans of why they have to do something to reduce their dependence on Russian natural gas and oil, Russia cut off oil supplies to Western Europe through the pipeline that crosses Belarus for three days during a dispute with Belarus.

Even in Washington the ice is thawing because of this conjunction of global-warming science and national energy security. The "Advanced Energy Initiative" in last year's State of the Union address promised a 22% increase in research for "clean" coal, "safe" nuclear power, "revolutionary" wind and solar energy, "cutting-edge" biofuels, hybrids and hydrogen fuels. This year I expect more research money to be thrown at the same sectors, with the possibility that the Bush administration will actually apply more federal cash to the big job: building unit volume in order to drive down costs for wind and solar, the most commercially developed of these technologies.

What does all this amount to from an investor's prospective? I'd break down the opportunities into two groups.

Group 1: Saving the world

These stocks maximize your long-term potential returns since they really can play a role in solving the global-warming problem.

Wind and solar: These technologies are set to go over the top and into the commercial market. There are several factors putting a breeze at the back of wind technology:

• More cost-efficient turbines have driven down the cost of using the wind to produce electricity by about 50% over the past 15 years.
• The European Union's carbon-trading systems put a price on pollution, making it more costly for utilities to do business the old way.
• Big utilities are able to raise capital at extremely low costs.
• Government funding for global-warming programs will be enough to finance the construction of manufacturing facilities that will remove the current solar-cell bottleneck. It's hard to grow a solar-energy market when no one can get enough raw material to build solar cells.

Stocks to watch: I'd look to add global-warming positions in European market leaders such as Gamesa (GCTAF, news, msgs) and Vestas (which trades on the Copenhagen Exchange under code DK001026806), Indian market leader Suzlon Energy (which trades on the Mumbai stock exchange under code 532667) and U.S. market leader GE Wind, a subsidiary of General Electric (GE, news, msgs). Or you can buy up-and-coming suppliers of key technologies to the wind industry, such as carbon-fiber supplier Zoltek Cos. (ZOLT, news, msgs) and ultracapacitor maker Maxwell Technologies (MXWL, news, msgs). In solar, my list would include First Solar (FSLR, news, msgs), a leader in making thin-film photovoltaic material, and SunPower (SPWR, news, msgs), which is making good progress in driving down the cost per kilowatt for solar cells because of the silicon manufacturing expertise of its parent Cypress Semiconductor (CY, news, msgs).

Transitional technologies: In the long run, burning natural gas to produce electricity (or to produce the electricity that you need to turn natural gas into hydrogen) still produces too much carbon dioxide to prevent massive climate change from global warming, but it sure packs less of a carbon-dioxide wallop than coal or oil. However, getting the natural gas where it needs to go is a huge job requiring immense capital.

• Stocks to watch: ExxonMobil (XOM, news, msgs) has already begun to move its hydrocarbon resource base strongly toward natural gas. It's the most obvious play on this opportunity, even if the company has fought global-warming science tooth and nail.

Unsexy technologies: This stuff doesn't fire folks up the way that talking about the hydrogen economy does, but for the really important decades between now and 2050, figuring out ways to reduce carbon emissions a little bit here and a little bit there will have a much bigger aggregate effect than big ideas that remain stuck in the research labs.

• Stocks to watch: I'm talking about a shift from incandescent bulbs to LEDs (light-emitting diodes) from Color Kinetics (CLRK, news, msgs), about using software and centralized control systems from Johnson Controls (JCI, news, msgs) to cut energy use in offices and factories, and about 3M (MMM, news, msgs) re-engineering everyday materials to cut the energy used in production and to increase recycling potential.

Group 2: Less-than-pure profit

These opportunities will make you a profit, at least over the next few years or so, but they really don't do anything to save the world from global warming.

Technologies likely to get big political bones: I'm talking mainly about so-called clean coal here.

It really isn't part of the solution because coal produces too much carbon dioxide per pound burned for any system of capture-and-storage to work. (Burn a ton of coal to generate electricity, and you get four tons of carbon dioxide.) However, any politician who says this right now is committing suicide: There are too many jobs at stake and too many well-funded lobbyists roaming the halls. It will take years for the technology to prove itself one way or the other, and in the meantime, the effort will be enough to build and support interest in clean coal and carbon dioxide-storage stocks.

• Stocks to watch: Headwaters (HW, news, msgs) and Praxair (PX, news, msgs). The former is the largest provider of technology and chemical reagents to the coal-based synthetic-fuels industry. The latter has announced joint research into improved carbon-dioxide capture technologies with utility AES Corp. (AES, news, msgs). Just so the coal folks don't think I'm picking on them, I'd put corn-based ethanol in the same camp -- lots of rhetoric and not much long-term future. Still, that rhetoric should be enough to make Archer Daniels Midland) (ADM, news, msgs) a profitable holding. (To be completely fair, the company is pushing ahead into other biofuels that hold more long-term potential.)

The technology of denial: On my Christmas visit to the coast north of San Diego, I got to witness the hugely expensive effort being put in to stabilize ocean cliffs by lining them with bulkheads and then injecting concrete into the dirt. If we're willing to spend millions to protect a few seaside condominium complexes, think how much we'll be ready to spend to protect farms on marginal land that has suddenly become even more marginal. I don't think you have to be a cynic to expect that we'll spend billions on desalinating sea water and on genetically engineering seeds to be more resistant to salty soils, to take just two examples.

• Stocks to watch: To bet on this very deep-grained desire to protect what we have from change, I'd suggest General Electric, a leader in the water business, and Monsanto (MON, news, msgs), a leader in the genetic engineering of seeds.

Update to Jubak's Picks

Sell Garmin (GRMN, news, msgs). I'm selling Garmin into the strength of the current technology rally. Garmin's shares haven't participated in this rally as strongly as I'd like because of worries about how shifts in the personal-navigation-device market might be hurting margins at Garmin.

This year's just-concluded Consumer Electronics Show in Las Vegas was rife with new low-cost but high-quality devices from new vendors. From preliminary holiday sales, numbers it looks like sales of high-end personal-navigation devices came on strong (good news for Garmin) but that at the low end these new vendors used very aggressive discounting in an attempt to build sales (bad news for Garmin).

Garmin and other higher-priced vendors, such as TomTom (TMOAF, news, msgs), defended their share at lower price points by extending discount periods and cutting prices further.

TomTom, for example, increased its lower-end discounts by an additional $50 a device. This can't help profit margins and increases the possibility that Garmin will announce great unit sales but profit-margin pressure for the past quarter and going forward when the company reports earnings Feb. 14.

As of Jan. 16, I'm selling Garmin out of Jubak's Picks with a 3.24% gain since I added the stock to the portfolio Oct. 12. (Full disclosure: I will sell my personal shares of Garmin three days after this column is posted.)

Buy SiRF Technology Holdings (SIRF, news, msgs). The bad news for high-end personal-navigation-device companies such as Garmin and TomTom is good news for GPS chip maker SiRF Technology. The company was clearly the preferred chip supplier for low-end vendors in the personal-navigation-device market at the Consumer Electronics Show and in the next generation of wireless handsets with GPS capability.

The stock has had tough going in 2006 on worries that the company was losing some of its estimated 80% to 90% market share. The company has indeed lost share, as is almost inevitable these days in any fast-growing and profitable technology sector, but even with a drop to 60% to 70% market share in 2007, as projected by Deutsche Bank, SiRF Technology should see its chip sales climb in 2007 as the personal-navigation-device market goes from 16 million units in 2006 to between 24 million and 30 million in 2007. I'm adding the shares to Jubak's Picks with a target price of $34.50 by September 2007.

New developments on a past column

"The state of coal stocks is strong": The best news out of Headwaters' (HW, news, msgs) recently doesn't involve its so-called clean-coal technology but the company's efforts to improve the upgrading of heavy oil to lighter transportation fuels such as diesel and gasoline. With high-sulfur heavy oil making up most of the world's new supplies of oil in recent years, any process that increases the yields and reduces the cost of turning those grades into products such as gasoline would be a big winner. On Jan. 4, Headwaters announced the successful completion of two additional tests of its catalyst technology to upgrade heavy oil at a North American refinery. The company has formed a new business unit, Headwaters Heavy Oil, to develop and market the technology.

There's just too much coal. U.S. coal production rose 10.3% year-to-year for the week that ended Dec. 9, and in November stockpiles at coal-burning power plants climbed to 28% above the level of a year ago and 9.3% above the 10-year average for November. Consol Energy (CNX, news, msgs) is best positioned for this state of oversupply with coal supplies being tightest and demand highest for the high-sulfur, high-BTU Northern Appalachian coal that Consul Energy mines. In the third quarter the company signed new contracts at better than $50 a ton for 2009, a level higher than current prices. That will keep earnings on an upward track in 2007 and 2008. Nonetheless, coal is in plentiful supply, and that will weigh on the shares. As of Jan. 16, I'm cutting my target price for Consol Energy to $44 from $48 a share by September 2007. (Full disclosure: I own shares of Consol Energy.)

Meet Jim Jubak at The Money Show

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Admission is free for MSN Money users and includes Jubak's seminars and access to more than 320 workshops, panel discussions and other sessions, as well as a chance to visit more than 350 top financial product and service providers in the exhibit hall. For complete details or to register for free admission, call 800-970-4355 (mention priority code #007420) or visit the Money Show Web site.

Editor's Note: A new Jubak's Journal is posted every Tuesday and Friday. Please note that Jubak's Picks recommendations are for a 12- to 18-month time horizon. For suggestions to help navigate the treacherous interest-rate environment, see Jim's new portfolio, Dividend stocks for income investors. For picks with a truly long-term perspective, see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com.

At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Consol Energy, Garmin and Zoltek Cos. He does not own short positions in any stock mentioned in this column.

Source: MSN