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Global warming gets hot and the stock market does not

One expert analyst has a selection of stocks that should stand up to a recession, and a group of top analysts offer their favourite stock picks.

This may seem to be an odd time to talk about global warming, in the midst of a winter in which the handle’s practically worn off the snow shovel, it’s been used so often.

On the other hand, the Environment Minister has been in Nunavut getting a first-hand glance at the fate of our polar bears, so the topic never really seems to rest these days.

Our purpose is not to ponder any of the inconvenient truths of global warming, but to see how convenient environmental science might be for investors.

We take our lead from Mr. Michael Smedley, writing in Investor’s Digest of Canada. This closed-end fund manager identifies the four stocks in this growing field he thinks are most likely to reward investors.

We’ll also follow the twists and turns of the stock market through the eyes of another contributor to this advisory. He thinks the market will be going down for some time and that investors should not be in a hurry to buy on dips. There are still a few long-term buys out there, however.

Staving off disaster

Remember Y2K? Power systems would fail, planes would fall from the sky, nothing would work! In the dying months of the twentieth century, software experts and auditors made billions trying to stave off an apparent disaster.

Yet when clocks ticked from 1999 to 2000 in one time zone after another, nothing happened except the traditional clinking of glasses. “Even in Saskatchewan, where the clocks never change,” says Mr. Smedley, “nothing went wrong.”

That is the parallel Mr. Smedley draws to illustrate the spending that can be generated by an urgent cause. The urgency about global warming seems certain to go on much longer than the one-and-done Y2K, but the point is made.

A lot of money is going to be spent. “The people are rallying to the politicians and investment banks on carbon credits, carbon-trading exchanges, subsidies to stimulate alternative energy.”

How do investors participate in the general theme of global warming? The same way they participate in any other industry: by identifying the companies who will get there first with the most effective approach.

The Queen saves on fuel

Mr. Smedley has a clear favourite: WFI Industries (TSX-WFI), which he calls the “first, best and longest held in my books.”

This company manufactures and distributes geothermal heating and cooling systems. According to the season, it feeds off a slightly higher or cooler temperature in the earth’s crust, slightly below the surface.

In practical terms, it creates a plastic-piping loop beneath your garden and feeds the water content into a box installed in the house. Its costs a lot to install it, but the energy is free. The savings on fuel costs are obvious.

The company’s number one client is Her Majesty the Queen at Buckingham Palace.

WFI was founded in Canada and seeded by an elderly investor in Fort Wayne, Indiana, whose family controls the company but has sold off a good deal of the stock.

There are only 12 million shares outstanding, adds Mr. Smedley, “so watch out how you buy. The stock is down nearly one-third in this bearish market but you still have to pay 30 times earnings for a small dose of free energy. The dividend is good at 2.8 per cent and generally rising.” The stock closed yesterday at $23.54, which means that it has moved very little over the past week.

Getting along with the salmon

Clean power developers may be old hat in the mountains of Switzerland but they’re new in the mountain valleys of British Columbia. One that has gotten off to a good start is Plutonic Power Corp. (TSX-PCC).

This company diverts river sections through turbines. It maintains excellent relations with “B.C. Hydro, native groups, financial backers and the salmon population,” says the fund manager. “It is one of the best of the greenest and has a long-term growth program.”

Its current capacity is 20 mega-volts (MV), but its next landmark should be as much as 1000 MV. The company holds contracts for as long as 35 years. “Several analysts like it,” adds Mr. Smedley, “and have price targets around $10 or higher.” The stock closed at $7.11 yesterday.

Pure metals for solar energy

“An even spicier buy,” according to Mr. Smedley, is 5N Plus Inc. (TSX-VNP), a specialist in solar energy. It began its metal purification career as a part of Noranda and has been a self-standing company since 2000.

It produces tellurium, cadmium and zinc at high degrees of purity known as 5N, 6N and 7N. Half of its metal powders go into thin-film solar light-gathering systems and half into other technologies.

The company has started to make money, says the fund manager, who enjoyed a 100 per cent gain on his investment as the stock shot up to $9.45 just before year-end. Half of that was lost in the general market profit taking, but the stock has come back as far as $8.35, yesterday’s closing price.

Up 7,000 per cent!

Mr. Smedley’s fourth stock is also in the solar sector. Timminco Ltd. (TSX-TIM) at one point recently was up 7,000 per cent! (Yes that’s three zeros, assures the fund manager).

Timminco markets a range of high-grade metals to a number of industries across the globe, particularly to solar-silicon users. This firm is more widely publicized than the others, and has a float of 49 million shares, half of its market cap. Positive earnings may be on the way this year, adds Mr. Smedley.

Timminco’s materials offer energy efficiency of 12 to 15 per cent, as opposed to five to eight per cent with thinner material. New materials and processes may eventually step up energy retention, but in the meantime this company is in a good position to take advantage of the growing support for solar power in many nations, especially Germany, Spain and China.

The stock spiked to $23.31 (that 7,000 per cent rise) and now stands at $15.97. But considering that its 52-week low is 34 cents, it’s come a heck of a long way.

Mr. Smedley holds these stocks in one or the other of his closed-end funds, Canadian General Invesments (TSX-CGI) and Third Canadian Invesment Trust (TSX-THD), so he is certainly banking on the greening of our power systems. The question is: when you’re getting in on the ground floor of a burgeoning industry, which stocks are the ones that will grow up to be the industry leaders?

Those who get the right answers are sure to reap handsome rewards.

A long drawn-out slowdown

Yesterday, we heard from an analyst who believes that the troubles facing the markets are fixable, and that things could begin looking up by the end of summer.

Not everyone is of the same opinion, of course. “This could be a long, drawn-out economic slowdown, as the excesses of the past six years are wrung out of the economy,” writes Mr. Grant Campbell in Investor’s Digest of Canada.

The over-heated real estate market must work off an enormous amount of inventory, he adds, a process that could stretch over 12 to 18 months. That means there will little support for consumer spending. It’s the real estate market, not the equity market, that stimulates that spending, adds the analyst.

Loans will be hard to come by over the next year or so as the major banks and financial institutions clean up their books. The U.S. Federal Reserve Board is “way behind in reacting to the economy,” in Mr. Campbell’s view. Many who were critical of the Fed for bailing out high-risk lenders with rate cuts now want the Fed to bail out the economy and stop a recession with yet more cuts. “Go figure,” says Mr. Campbell.

The bear market is under way, says this analyst, and investors must get used to the idea that the markets will keep going down. “The process will be volatile and stressful and, ultimately expensive, unless you prepare yourself for the bear.”

Do not try to buy on dips

This is not a time, Mr. Campbell warns, to buy stocks that have fallen in price. It is a time to take profits when the possibility arises.

“On any rallies in the market, lighten up,” he advises. “Do not try to buy on the dips. This will be a very expensive and ultimately futile attempt to catch the proverbial falling knife.”

The news will not get better any time soon. “This market is going to go down a lot further than you think, so save your capital until there is a clear change in direction.”

A bear market causes a change in leadership sectors, he adds. The leaders for the past four or five years are not likely to lead the pack over the next five years.

Financial stocks are due to lead the way down, not surprisingly, as they dispose of billions of dollars of bad credit. Base metals will remain elevated, but the soaring prices of recent years will not be repeated over the next four years.

“Investors will have to be much more selective,” warns Mr. Campbell. But there will be winners, at least in the long term.

Energy and agriculture in demand

Start with energy. Demand will not be going down and the supply is stagnating. “Energy companies focused on the oil sands such as Suncor Energy Inc. (TSX-SU) should trade at a premium to other companies over the long term, due to the huge reserves they control.”

The agricultural sector should keep on growing as well. U.S. politicians continue to push for more ethanol and Asia’s growing middle class pushes for a richer, more nutritious diet.

That makes Canada’s big fertilizer firms, Agrium (TSX-AGU) and Potash Corp. (TSX-POT) strong buys for the long term. South of the border, John Deere (NASDQ-DE) should keep on running very nicely.

“Investors may want to increase their exposure to gold over the short term as a possible hedge against political and economic turmoil,” Mr. Campbell tells his readers in Investor’s Digest of Canada. “Other than that, I would be very careful and conservative for 2008, getting ready for 2009.”

That looks like a worst-case scenario to us. But in the best of all possible worlds, we can hope that climate change will be slowed down and market change will be speeded up, to the greater profit of investors.