Company

Weighing stocks? Consider the saints and sinners

Wednesday, February 18, 2009

As you watched the value of your portfolio plummet and cast around desperately for something - anything - that will provide a decent return, you might be forgiven for setting aside notions of purely ethical equity investing. After all, someone's going to profit from other people's frailties - why shouldn't it be you?

If, on the other hand, you're still determined to tread lightly on planet Earth while building your nest egg, there are plenty of opportunities, even in the relatively small Canadian market. Despite what skeptics might say, most "green" companies are not subsidy-hungry enterprises hawking pipedream technologies. There are many out there with long track records, solid management and, yes, profits.

THE SINNERS

A year ago, Charles Norton was almost giddy at the prospect of a market rout. He's co-manager of the Dallas-based Vice Fund, a mutual fund that focuses on "sinful" industries and products such as alcohol, tobacco, gambling and weaponry. "People smoke and drink and gamble, and nations defend themselves, in good times and bad," he said at the time. "When there's blood in the streets, these sectors really shine."

Well, Bay and Wall Streets are bathed in red - and so is the seven-year-old Vice Fund: It was down more than 41 per cent in 2008. Mr. Norton cites its holdings in the gambling sector for the fund's sharp drop. "`Gambling` really imploded last year," he said in a recent interview.

Macau, China's erstwhile Sin City, is looking more like a ghost town, for example. And if you're looking for travel deals closer to home, Las Vegas has 'em in spades.

"The problem is that gaming is a very capital-intensive business at a time when the credit markets made capital inaccessible," Mr. Norton says. "And in this type of severe recession, consumers have had a hard time putting food on table, much less planning trips to Vegas."

Of course, he's still betting on sin. Although the Vice Fund is not available to Canadian residents, here's a rundown of his favourite sectors:

His top pick, by far, is Big Tobacco. "Part of the picture that people miss is the affordability of cigarettes relative to other consumer goods," he says. Sales keep increasing in emerging markets, where he says smoking rates are sometimes in the 60-to-80 per cent range, and smokers continue to "trade up" to international brands such as Marlboro.

New York-based Philip Morris International, which owns the world-beating Marlboro brand outside the United States, is Vice Fund's top holding, at about 15 per cent.

While PMI's stock is down 30 per cent since it was spun off from Altria Inc. last May, 2008 revenue was up almost 13 per cent, with earnings per share of $3.32 (U.S.) - an increase of 16 per cent. (Last summer, PMI inhaled Canada's own Rothman's for $2-billion, adding to its roster of international brands.)

And then there's alcohol. For the past few years, the buzz in booze was all about premium, super-premium and imported beer and alcohol. But in these tough times, cheap is chic. London-based Diageo PLC, whose brands include Captain Morgan, Guinness, Smirnoff and Crown Royal, is Vice Fund's second-largest holding, at 10 per cent.

Diageo's stock may be getting hammered, but volume is on the rise, particularly in emerging markets in Asia and Africa. So are earnings per share, up 9 per cent in the second half of 2008. Mr. Norton is also heavy in Pernod Ricard and SABMiller PLC; both have seen frothy sales and profit growth of late.

THE SAINTS

Sara Elford's mission is about as different from Mr. Norton's as you can get. As a top-rated analyst with Canaccord Adams, the Halifax-based Mr. Elford scours the Canadian market for sustainable companies - in both the financial and environmental sense.

"Sustainability doesn't have to be sexy. It doesn't have to be solar panels. It doesn't have to wind turbines. And that's the key: There are a lot of things that companies can do that are just smart - they don't have to be exotic," she says.

Many of the companies she follows are early-stage, and that tends to scare off investors. "All these companies face great opportunities, but also great challenges in getting their technologies to market, even when the economics are not the hurdle," she says. "But over the long term, there's good momentum in people's desire and willingness to make changes."

Here are some of her picks:

Edmonton-based Stantec Inc. does engineering and design consulting on infrastructure and facilities projects, with an emphasis on sustainability. Not only does it have a large environmental practice, but its new building in Toronto is a showcase for green technologies, too. Shares are trading at around $22, down almost 30 per cent from a year ago.

Revenue for the first three quarters of 2008 was up 40 per cent, to $983-million, though earnings per share were just 20 cents (down a staggering 80 per cent) because of writedowns. It's just a blip, Ms. Elford says, citing the company's 55 consecutive years of profitability. "They take a sustainability stance across the board, it just happens to be important to them."

WaterFurnace Renewable Energy is based in Fort Wayne, Ind., and trades on the Toronto Stock Exchange. It has been manufacturing geothermal heating and cooling pumps for 26 years. Although geothermal's U.S. market share is only about 1 per cent, Ms. Elford believes the company is well poised to capitalize on increasing interest in the technology.

"They're growing rapidly, their return on investing capital is pushing 40 per cent, and they pay a dividend. And if you look at the stock price, they're trading not too far off their 52-week high, despite the market carnage."

`Emphasis added`Thirteen-year-old Carmanah Technologies Corp. of Victoria develops self-contained solar LED and power systems for industrial applications, such as marine beacons, runway lights and transit signals. It's still small (revenue in the third quarter of '08 was just $14-million), but it's debt-free, and a new management team that took over in 2007 "is awesome," according to Ms. Elford.

"It will take time for the broader markets to pay attention to what they're accomplishing, but they're profitable, the balance sheet's in good shape, and there are growth opportunities globally. And their products just make lots of economic sense."

Pure Technologies Ltd. of Calgary may be low on sex appeal - it helps monitor bridges, pipelines, buildings and reservoirs to ensure they're operating efficiently -but with all sorts of new infrastructure projects getting the green light, Pure could be sitting in a sweet spot. One of its latest contracts is detecting leaks in water and wastewater pipelines in New Orleans.