CHOOSE WISELY
How to separate the lasting trends from the fads.
There is no shortage of opportunities in the environmental investing space. Take the water industry: Some companies extract water from lakes and rivers, others purify it or treat waste water from mining sites, while others pack it up in bottles or sell it to municipalities. And that’s only part of the value chain in this massive industry.
Such themes seem like nobrainers for investors since everybody needs and wants clean water. But there is, of course, much more to consider.
Popular themes can get over-crowded and push valuations to unreasonable levels. Timing is also a critical factor, especially in the water business since there are times when municipalities and various industries aren’t investing that much into technology, or when bigger macro trends have an impact on the industry’s dynamics.
“Whether it’s waste water management, solar power or energy-efficient lighting, there are choices at every point in the value chain within each industry,” said Martin Grosskopf, portfolio manager at AGF Investments. “There are a lot of cycles within these secular growth stories, so that’s a challenge.”
One area Grosskopf likes in the broader energy and
Acuity Brands Inc. (AYI/NYSE) SunEdison Inc. (SUNE/NYSE) WhiteWave Foods Co. (WWAV/NYSE)
power space is smart lighting technology related to improving energy efficiency in homes and other buildings. There are companies that provide inputs to LED lights, those that actually make the bulbs, and those that brand and sell them.
There’s little debate that conventional lighting is becoming more obsolete, as LEDs are estimated to be 85 per cent more efficient. As regulations tighten and homeowners look to reduce their power costs, Grosskopf likes the prospects for Acuity Brands Inc. (AYI/NYSE), a provider of lighting solutions, and owns it in the AGF Global Sustainable Growth Equity Fund.
Four years ago, Acuity Brands’ exposure to LED was somewhere between five and 10 per cent. Now that business is approaching 50 per cent of its revenue.
“Right now, we think most of the margin and advantage is aligned with companies like Acuity,” Grosskopf said, noting that he’s owned LED-manufacturers such as Cree Inc. in the past, but that segment is facing pressure from lowercost options from China.
Solar power is another industry where there is plenty of choice: there are companies that produce the materials that go into solar panels, those that actually make them, and those that develop projects. Again, Grosskopf positions the portfolio differently depending on how the industry is evolving or as a result of economic conditions.
For several years, the money to be made was in the manufacturers. But that market has become extremely cost competitive. As a result, Grosskopf is more interested in project developers such as SunEdison Inc. (SUNE/NYSE), because they can source from a number of different manufactures.
“We’re interested in their ability to turn over new projects, identify new contracts with utilities, and take advantage of the big move toward rooftop solar for residences,” he said. “Companies are able to lease the space on your roof and offer a power solution, and that’s very attractive in the U.S. right now.”
That model is expanding to places such as Japan, and has only begun to emerge in places like India and Africa.
Grosskopf also noted that SunEdison off-loads its projects into a yieldco, TerraForm Power Inc., and gets a good multiple for doing so.
Yet another massive opportunity lies in the healthy living space, whether that means buying a small nutritional supplement maker, a massive retailer such as Whole Foods Market Inc., or a consumer packaged food company like fund holding WhiteWave Foods Co. (WWAV/NYSE).
“Conventional grocers are lucky if they’re growing at GDP,” Grosskopf said, but the organic food sector is growing at nine to 10 per cent annually.
The world’s largest food companies have taken notice and are going after names such as Annie’s Inc., which makes organic macaroni and cheese among other products.
WhiteWave’s popular Silk almond and coconut milk are sold at both specialty retailers and big-box stores such as Wal-Mart Stores Inc. — its biggest customer.
“It fits one of our key themes of sustainability, and that’s resonating with investors,” Grosskopf said. “Most people are shopping in a more healthy fashion and are more concerned about what’s in their diet.”
At the same time, large branded product companies such as Campbell Soup Co. and Coca-Coca Co. are looking at ways to make their products healthier, whether by offering new options or reformulating existing ones.
A big challenge for anyone interested in this space is separating the lasting trends from the fads, and that goes double for investors.