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3 'green' stocks that don't care who's president
Conventional wisdom says that environmental stocks will suffer if President Bush is re-elected. But this trio of environment-friendly businesses should prosper however the election turns out.
By Michael Brush
Check out the predictions of the kinds of companies that would do better under each presidential candidate and you'll likely hear that another four years of President Bush would be bad news for environmental stocks.
So with candidate John Kerry slipping in the polls, its time to sell those stocks, right?
Wrong!
We found three that will do well no matter who is elected. Pick up some shares if they sell off on further Kerry weakness in the polls -- or if the senator loses.
These three stocks have either businesses or potential businesses so strong it wont matter who prevails. Or they will win some and lose some under each candidate, making the election outcome a wash.
Heres a closer look.
Headwaters
Environmentalists love to hate coal-burning power plants, which spew all sorts of pollutants into the air. But things would be worse without Headwaters (HDWR, news, msgs), a company that removes much of the fly ash produced when coal is burned.
Headwaters recycles the ash, a talcumlike powder that would otherwise blow off into the atmosphere. It is converted to concrete, cinder blocks and even artificial stones that might sit in your back yard.
Headwaters commands about half the market for fly ash and other recyclable coal byproducts and gets about 26% of its revenue by selling bulk ash to companies that use it to make construction materials. Headwaters keeps about half the ash it recovers and makes these materials itself. Its building-materials division produces 44% of revenue.
The process also reduces carbon-dioxide emissions. Heres how. Making a ton of cement to produce concrete produces about a ton of carbon dioxide. Use fly ash instead of cement and you keep about a ton of carbon dioxide out of the atmosphere.
Thanks to the construction boom and cement shortages, business is booming. We are having a record year, says Headwaters chief executive Kirk Benson. The company expects earnings before interest, taxes, depreciation and amortization -- a form of cash flow -- to grow between 33% and 39% next year.
Protection from a soft economy
Wont rising interest rates and a slowdown in construction hurt Headwaters building-materials business? Maybe. But sales of fly ash wont suffer. In a down market, building-materials companies use more fly ash, says Benson. Its cheaper than cement and produces a stronger form of concrete.
Headwaters gets the remaining 20% of its revenue from royalties on a process used to convert coal dust to synfuel -- briquettes that are used by utilities to create power. Headwaters scores points with environmentalists here. The dust is gathered at plants that would otherwise throw it out, or it is taken out of waste ponds.
A little problem on the horizon is that companies using Headwaters technology to turn coal dust into synfuel find it only profitable because of federal tax concessions set to expire at the end of 2007. But Benson thinks the tax concessions will be extended. If not, the company has done a good job of diversifying away from this business, which a few years ago accounted for 100% of revenue.
What about the presidential race? "We will be just fine no matter who gets elected, says Benson.
Bush will be friendlier to utilities using coal. But Kerry would support the synfuel tax break and development of oil alternatives. Headwaters has a division dedicated to breakthroughs like that. For example, its developed a process that makes diesel fuel from coal, a resource thats abundant in North America.
Clean Harbors
Clean Harbors (CLHB, news, msgs) handles the nastiest stuff churned out by industry. It manages hazardous-waste disposal for a wide range of sectors, from drug makers to petrochemical producers. Clean Harbor also offers one-off clean-up and emergency services. The company, for example, handled some headline-grabbing anthrax decontamination work in 2001.
Though waste removal may seem like a low-growth business, Clean Harbors recently commanded the attention of the market's momentum crowd. In mid-August, the company got a shot of upward earnings-estimate revisions. That helped push its stock out of a trading range capped at $10 for most of this year.
The breakout landed Clean Harbors on the buy list at Kevin Kennedys Coolcat Explosive Small Cap Growth Stock Report -- another plus. Kennedys newsletter has a lighthearted moniker, but his record is dead serious. The Coolcat report is ranked No. 1 by Hulbert Financial Digest for five-year returns.
Whats behind Clean Harbors breakout? Lets begin with a little history. Clean Harbors Chief Executive Alan McKim started the company 25 years ago and took it public in 1987. He is the largest shareholder. Since then, McKim has done 14 acquisitions, turning Clean Harbors into the largest hazardous-waste management company in North America.
Two years ago, McKim bought out his largest competitor, the chemical-services division of Safety-Kleen, a company mired in bankruptcy. This doubled the size of Clean Harbors. McKim says he got a good deal, but there were snags, including unexpected revenue weakness that led to cost-cutting. The integration proved a lot more challenging than they thought, says Michael Roesler, who covers the stock for brokerage CJS Securities.
Now, the merger is paying off. We are finally starting to deliver some real positive performance, says McKim. That explains the recent revisions -- and the breakout.
Better times ahead
It looks like there are more benefits to come. First, theres more cost-cutting, especially as Clean Harbors figures out how to better use the rail and transport assets it picked up from Safety-Kleen. Next, in the Safety-Kleen deal, Clean Harbors picked up mainly waste-disposal customers. Now it hopes to sell other services to them. Third, the company recently refinanced and took out long-term debt, freeing up $10 million for more acquisitions.
Clean Harbors should pick up new business because of stricter Clean Air Act standards slapping tighter air-pollution limits on companies that incinerate their own hazardous waste. Roesler expects many companies will find the changes too complicated to deal with and ask Clean Harbors for help.
McKim doesnt think the presidential race will have a big impact either way. More regulation would drive more customers his way. But it could also raise costs for his business, and offset the difference.
Solucorp Industries
Probably the riskiest -- but potentially most rewarding -- environmental stock on our list is a tiny New York-based outfit called Solucorp Industries (SLUP, news, msgs).
Its risky because it resides in the relatively murky end of the stock market known as the pink sheets. Named after the color of the paper used to profile their operations, pink-sheet companies have little financial transparency. And they usually trade in this fringe market because the normal exchanges wont list them.
That doesn't mean there aren't some gems in the pink sheets -- and Solucorp may be one of them. The tiny company has three areas of business, which may begin producing some relatively big revenue over the next six to 12 months.
First, the company has a patent on the use of a compound spread on pollution sites to help contain heavy metals such as lead, cadmium or mercury. Known as Molecular Bonding System (MBS), the process changes the chemical makeup of heavy metals so that they dont leach into the environment.
MBS is proven technology, says Solucorp President Richard Runco. It is economical, and it is user-friendly. MBS, accepted by the Environmental Protection Agency as an alternative clean up technique, converts heavy metals into their sulfide form so they wont oxidize. When metals oxidize, they tend to leach out of a site and drift into neighboring land or water tables. We put them into their most insoluble state, which means they will not leach, says Noel Spindler, the director of technology for Solucorp. The metal is still there, but fixed into a form that is non-hazardous."
You still wouldnt want your children playing on a treated site. But recovered land is good for industrial and commercial uses. Plus, the process means contaminated material can be disposed of in non-hazardous waste sites. This cuts removal costs by two-thirds or more.
Its a little troubling that MBS has been around for years without much in the way of sales. But that seems to be changing. Solucorp signed a letter of agreement earlier this year with the environmental division of ENI (E, news, msgs), a huge Italian energy conglomerate, that could potentiallly bring hundreds of millions of dollars of work in the coming years. MBS also has been selected for use on Massachusetts highway projects and may be used for lead clean-up in Omaha, Neb.
The compounds behind MBS also can be slipped into products containing heavy metals from batteries and bullets to computer motherboards and phone switches. This controls their impact on the environment once they are used and tossed out. The same chemicals are put in paint remover to neutralize the lead in the paint being stripped. This process also can be used to control mercury emissions at coal-burning power plants. Thats a potentially big application, as power plants are forced to slash mercury emissions over the next several years.
Finally, Solucorp recently purchased a private Florida company called WITS, which has an electro-coagulation technology that uses electrical currents and plates to decontaminate waste water. Solucorp will likely sign a contract in December with a large chicken processor that wants to use this process.
Besides being on the pink sheets, another thing holding Solucorp back is the need for audited financials so more investors can get a handle on the tiny company. An audit is in the works, and it should be finished soon, says Geoffrey Eiten, who does investor relations for Solucorp at OTC Financial Network.
The audit -- plus some more deals -- should help Solucorp graduate to the Nasdaq from the pink sheets at some point. The technology has been proven no matter what the numbers are. You cant take away from the technology, says Eiten.
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