The Green Alpha Advisors' approach to portfolio management utilizes a top-down macroeconomic model reflecting how global economies will evolve to meet demands presented by modern challenges such as resource scarcity, growing populations, land and food management, atmospheric carbon and extreme weather, to name a few.
These emerging challenges are daunting, but fortunately, society is answering and acting to preserve our economies and way of life with a new wave of innovation, the like of which has not been seen since the information technology revolution of the 1990s and the industrial revolution before that.
The companies providing these innovations will see rapidly increasing demand over the next few years as economies rise to meet big challenges, and capital, as it always does, will flow to the best solutions. This is what defines the next economy: it is comprised of companies providing products and services that can thrive in the future economy as well as they do now (perhaps even better), and/or companies whose business is directly in the path of solving one or more of our main challenges.
It is among these innovators that one may now find the next Googles, Apples and Amazons. And, as with the first to see the promise of information technology, the first investors into the next wave of innovation will be the ones who have the best chance of outsized returns. With that in mind, here are four companies, based here in the U.S., that are timely in their deployment of innovative technologies, ideas and services. The global economy's next leap forward is beginning with firms like these.
Ocean Power Technologies, Inc. (OPTT) designs, makes and deploys ocean buoys that generate electricity from the kinetic energy of ocean waves. Their technology is proven effective, and in places where waves are always present (like the West coast of the U.S.), it doesn't suffer from intermittency as do wind and solar. Among Ocean Power’s best customers and advocates is the U.S. Navy, which has identified wave electricity as a way to power bases and missions, and yet have no reliance on external sources. Ocean Power has also recently teamed up with Lockheed Martin to deliver two utility-scale projects, one off the coast of Oregon and the other for the Commonwealth of Australia. This is a small company with great growth prospects.
UQM Technologies, Inc. (UQM) makes propulsion systems for electric vehicles (EVs). UQM is not an electric car maker, but provides power systems and drive trains to companies making or converting fleets to electric. FedEx, UPS, London Taxi cabs, Audi and many others have converted portions of their fleets to electric using UQM. UQM's systems are remarkably efficient. FedEx CEO Fred Smith has said his electric delivery vans operate at 75% less cost than diesel vans. As Smith said, "Not 7.5%, 75%. These are big numbers." Recently, UQM has also entered into a memo of understanding to provide its electric propulsion systems to China's "New Energy Vehicles" state program. With its record of quality implementations, strong client list and ability to deliver big cost savings, UQM is a great way to get exposure to the EV sector without betting on any individual car company.
GT Advanced Technologies Inc. (GTAT) is an original equipment manufacturer (OEM) providing the machines that help make light emitting diodes (LEDs) and solar panels. LEDs are bright, adaptable to uses from TVs to phones to streetlights, make light with far less electricity than incandescent or fluorescent, and last as long as 20 years between replacing. As a result, the LED sector is booming. Solar, for its part, is clearly going to be one of the main pieces of our electricity mix going forward, and the guys who make the machines that make the panels should have steady business as this growth accelerates and will be less sensitive to fluctuations in the prices of the panels themselves (as opposed to panel and module manufacturers).
Remarkably, GT was competing just fine toe-to-toe with the Chinese solar industry, long before U.S. tariffs on Chinese solar came along, a fact that inspires confidence in management effectiveness. In both LED and solar, GT Advanced Technologies is a great way to invest in an overall industry without having to select individual product manufacturers.
Trex Company Inc. (TREX) manufactures and distributes wood-composite lumber substitutes for residential and commercial decking, railing, fencing and similar applications. Trex makes its products from reclaimed wood and plastic waste, and their boards are attractive and very durable. (Trex claims a positive return on investment of its products versus wood is less than 6 years). We consider Trex a prime example of waste-to-value economics that not only keeps huge quantities of waste out of landfills and oceans (Trex used 3.1 billion plastic bags in 2010, and is responsible for 70% of all U.S. plastic bag recycling), but also delivers a superior product with better long term value. In a world of constrained resources, making great stuff from leftovers is the best of all worlds.
Each of these four firms has a great operational story, and they fit well within Green Alpha’s macroeconomic thesis. In addition though, three of the four have to differing degrees suffered share price setbacks recently, providing attractive entry points. Ocean Power and UQM Technologies in particular have suffered long retrenchments but due to recent business improvements have begun to see share prices stabilize. OPTT is trading below both cash and book value and, with several projects upcoming, should be able to reach profitability and expand from there. UQM is expecting to reach profitability in its next full calendar year, and could be poised for rapid growth.
Already profitable and with a much larger market cap, GT Advanced Technologies is less speculative that the OPTT or UQM, yet has seen its share price decline rapidly as well. GTAT’s solar business probably explains that, as solar manufacturing stocks as a group have done poorly since mid-2011, but the market may be mispricing GTAT on this basis for two reasons. First, GTAT is not a panel maker, but a business to business panel equipment provider, where orders have remained more consistent. Further, GTAT’s other business, LED lighting, should be insulating it from the full vagaries of solar valuations. Second, GTAT has a very strong balance sheet which should allow it to withstand solar’s downturn, and the company remains profitable, expecting steady or modestly growing EPS for the next couple of years. Still, the company today trades at only 63% of sales and only 1.6 times book, so there’s plenty of upside potential as the company comes back to objectively reasonable valuation.
Trex is the one firm discussed here to have had outstanding share price performance so far this year, and with good reason. After losing $0.75 per share in 2011, the company is poised to earn $1.58 in 2012 and is forecasting $2.33 EPS for next year. Booming growth by any reckoning, resulting in a forward year PE of 14. Given their earnings growth, TREX need only return to their historical PE average just above 19 to deliver a nice return to forward looking next economy investors.
Disclosure: Green Alpha Advisors is long GOOG, OPTT, GTAT, UQM and TREX, but has no positions in AAPL, AMZN, NSU, FDX, UPS or LMT.
Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."