Good Company, Bad Company
Looking for a Super Bowl Stock Boost
We happen to be big New Orleans Saints fans. So after we recovered our voices following the Super Bowl, we started thinking about how many folks we’d seen around the country, and particularly in Louisiana and Mississippi, wearing Saints paraphernalia. So where were these folks buying their souvenir T-shirts and jerseys?
We found an article from a Mississippi newspaper noting that the local Hibbett Sports stores had been mobbed by Saints fans. So that gave us an idea for a stock possibility. Will the Saints add a “halo” effect to Hibbett (HIBB) stock?
Hibbett Sports, which specializes in branded merchandise focused on team sports, operates sporting goods stores in small to mid-sized markets predominantly in the Southeast, Southwest, mid-Atlantic and lower Midwest. The company appears to have created a niche market for itself by strategically aligning its merchandise to regional/local sporting and community interests. This may actually gives the company a competitive edge in these markets over larger rivals, such as Dick’s Sporting Goods (DKS) and Big 5 Sporting Goods.
Looking deeper, the company is in the midst of a brisk store expansion program and plans to augment its network by 42 new stores as well as expand 18 to 20 high performing stores during fiscal 2010. Furthermore, Hibbett s management has already identified 350 potential locations for future stores and recently ramped up its distribution center to support over 1,200 stores from 1,000 stores earlier. This provides a strong upside potential to the company.
Hibbett has a healthy debt-free balance sheet with cash and cash equivalents of $24.8 million at the end of fiscal 2010 third quarter coupled with full availability under its $80 million unsecured credit facilities. This offers Hibbett the financial flexibility to drive future top-line expansion. What’s more, the company has a good track record of returning cash to shareholders in the form of regular share buybacks.
The stock appears to be a little expensive right now, but we’re definitely adding it to our watch list.
February 16, 2010 • Good Company/Bad Company
Are Utility Companies Getting Useful?
We didn’t think much of the utilities category when we used to play monopoly. The two holdings that were of the least value on the board were always the utilities - Water Works and Electric Company. This was because you couldn’t build on them, no one ever seemed to land on them, and frankly, they were boring. That’s what utilities tend to be. They’re there when you need them – everyone needs light and water—but they’re easy to overlook, so you take them for granted. But it might be a good time to think about them outside the game board.
Bond fund king Bill Gross and folks like him have been saying that the market’s “new normal” is likely to be a lower-returning world. Diminished growth and deleveraging will lower profits and their distribution to investors in the form of dividends and interest.
So what should the investor in search of decent returns do now, when investment grade bonds are returning a mere .75% on investment? That’s not much better than the mattress. Dividend-paying equities will get you 2% or lower, on the average.
Bill Gross argues convincingly that if companies are moving toward the model of utilities, why suffer the risk of equities with a low 2% return. Why not just buy utilities if you’re looking for dividends with lower risk? Price-wise, they’re only halfway between their 2007 peaks and 2008 lows – 25% off the top, 25% from the bottom. Their growth in earnings should mimic the U.S. economy as they always have, and most importantly, they yield 5-6% not .01% that the bank offers.
What’s more, the smartest sector watchers have been pointing to utitilies as a rising sector.
There are three ETFs (exchange-traded funds) that will get you a nice exposure to utilities.
IDU
iShares Dow Jones U.S. Utilities Sector Index Fund (IDU) seeks investment results that correspond generally to the price and yield performance of the Dow Jones U.S. Utilities Index (the Index). The Index measures the performance of the utilities sector of the United States equity market, and includes companies in industry groups, such as electricity, gas, water and multi-utilities. The Index is a subset of the Dow Jones U.S. Index and is capitalization weighted. Component companies are adjusted for available float and must meet objective criteria for inclusion to the Index. The Index is reconstituted quarterly. The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. The Fund’s investment advisor is Barclays Global Fund Advisors.
VPU
Vanguard Utilities ETF (VPU) is an exchange-traded class of shares issued by Vanguard Utilities Index Fund. The Fund tracks the performance of Morgan Stanley Capital International United States Investable Market Utilities Index, an index made up of stocks of large, medium-size and small United States companies in the utilities sector, as classified under the Global Industry Classification Standard (GICS). This GICS sector is made up of those companies considered electric, gas, or water utilities, or companies that operate as independent producers and/or distributors of power. The sector includes both nuclear and non-nuclear facilities. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
XLU
Utilities Select Sector SPDR Fund (XLU) seeks to provide investment results that correspond to the price and yield performance of the Utilities Select Sector of the S&P 500 Index. The Index includes companies from industries, such as electric utilities, multi-utilities, independent power producers and energy traders, and gas utilities. The Fund utilizes a passive or indexing investment approach to attempt to approximate the investment performance of the Index. The Fund’s investment advisor is SSgA Funds Management, Inc.
The Select SPDR (XLU) is the most dollar-liquid utility ETF, and it has just slightly outperformed the other funds. The largest fund is by far the iShares DJ Utility Index tracker (IDU). The Vanguard utility fund, VPU, and IDU have the best Yield minus Expense for those looking for income in their holdings.
All in all, we prefer XLU, though the others are good choices as well.
December 11, 2009 • Good Company/Bad Company
How Much Is a Wrinkle Worth?
A very good friend of ours in her early 80s recently had to use a prescription skin cream to remove some precancerous spots on her face. Her face turned red and blotchy for a week, but after the treatment, not only were the lesions gone; so were some wrinkles. We made a note, wondering if this was the usual result. If so, we thought, here’s an inexpensive and effective wrinkle treatment. And maybe a promising stock. We were right. The stock is now up 50% since we first mentioned Valeant Pharmaceuticals (VRX) back on June 16th.
The company just reported total revenue of $220.3 million in the third quarter of 2009, an increase of 31% over the third quarter of 2008. Product sales in the company’s Specialty Pharmaceuticals segment, which includes Efudex, increased 45% to $101.6 million. And what’s more the company has raised guidance for 2009 to between $2.10 and $2.20, up from prior guidance of $1.90 to $2.10.
According to a study in the June issue of Archives of Dermatology, a skin cream containing fluorouracil, a chemotherapy medicine that treats precancerous skin patches, also reduced sun damage and wrinkles on the faces of 21 people who used the drug. Researchers saw improvements over 24 weeks in dark spots, yellow skin tone and hyperpigmentation, according to the study. The fluorouracil caused the skin to become red and irritated, making it peel as it worked to eliminate unhealthy skin, study authors said.
Doctors use cream with fluorouracil, which is available as a generic and under the brand name Efudex from Valeant Pharmaceuticals International (VRX), to treat skin lesions caused by intense sun exposure. Those spots, called actinic keratoses, are considered to be precancerous. Lead study author Dana Sachs said she’s not sure if fluorouracil would reduce wrinkles in those with healthy skin and a study is needed to answer that question.
“From our study, we can only say that it works for moderate-to-severe sun damage,” said Sachs, an associate professor of dermatology at the University of Michigan in Ann Arbor, in a June 12 telephone interview. That benefit also comes with a drawback.
“You really need to see that inflammation and irritation in the skin in order to see that improvement,” she said. “This is a tough treatment.”
This was the first study to show that fluorouracil cream improves sun-damaged skin, which includes dark spots, hyperpigmentation and sallow complexion as well as wrinkles.
We looked at the fundamentals and valuation of Valeant Pharmaceuticals, and found that it rates about a B. But that doesn’t include any benefits yet from this new study. Analysts give it a price target of $27 a share, although, again, that doesn’t reflect any potential boost from the study. So we wanted to bring it to your attention as a stock worthy of watching.
Study Results
Researchers examined 21 healthy people ages 56 to 85 who had actinic keratoses and sun-damaged skin. The participants applied fluorouracil cream over their entire face twice a day for two weeks.
They were examined for six months after the study started, when researchers found the average number of precancerous skin lesions dropped to 1.5 from 11.6.
Within 10 weeks of starting the cream, 19 of 20 participants said the sun damage to their skin was improved. Also, 16 of 19 said their wrinkles were improved, including 8 who called that benefit “mild.”
Overall 12 of 19 patients reported the treatment was uncomfortable, though 17 said they would be willing to undergo the therapy again, according to the authors.
Sachs said fluorouracil works to reduce the signs of sun damage by increasing the levels of a precursor to collagen, which rebuilds damaged skin. The cream may not be a good choice for everyone.
“For people who are out in the limelight or for professionals, it could be very hard to go to work and attend social functions if you have a lot of redness and scaling. It is a drawback because that lasts for several weeks,” she said.
November 02, 2009 • Good Company/Bad Company
The Flu Factor: A Lesson in Market Dynamics
Things can happen quickly at times in the market. Over the weekend, fears of a flu pandemic incubated, and the result was a drastic drop in some stocks and a quick rise in others when the market opened on Monday.
First of all, because the newly discovered strain of flu was identified as a swine flu, the price of pork and the shares of pork-related companies plummeted. From our point of view, this also brings up an ethical point. Stories have emerged of the poorly run giant hog farms operated by a subsidiary of Smithfield Foods (SFD) in the Mexican state of Veracruz, which some Mexican officials have identified as a possible source of the flu. The origins of the flu strain have not been verified. But the reports of unsanitary conditions surrounding the company’s operations appear to be true. And that means that we would simply not invest in Smithfield Foods. Shares in the company plummeted more than 10 percent.
On the other hand, shares of companies that will benefit from the outbreak have risen. The obvious ones are Roche (RHHBY), the maker of Tamiflu, and GlaxoSmithKline (GSK), which produces Relenza, the other medication used to combat flu symptoms. Basel, Switzerland-based, Roche, which said it has an ample supply of the Tamiflu treatment that can reduce swine flu symptoms, added 3.9 percent in Europe to 145 Swiss francs. Chugai Pharmaceutical Co., the Tokyo-based unit of Roche, surged 14 percent in Asia to 1,845 yen. Roche and Glaxo, not surprisingly, gained as well in the U.S. market.
Similarly, shares of Biota, the small Australian company that holds the patent for Relenza, soared nearly 80% in that market.
Another company, this one based in the U.S., will also benefit, and that’s Gilead (GILD), which holds the patent for Tamiflu and will receive a percentage of Roche’s profits. It’s a much larger and more diversified company than Biota, however, and obviously won’t gain nearly as much. Other companies that will benefit include the makers of surgical masks, which would include 3M (MMM) and Kimberly Clark (KMB). Of these two, Kimberly Clark would be the better choice for investors. The company maintains a Web site for preparedness in case of a pandemic.
Still another beneficiary is Quidel (QDEL), which makes rapid diagnostic kits for the flu.
Life Technologies Corporation (NASDAQ: LIFE) announced that it is providing its technologies to health officials across the globe to aid in the identification of influenza strains, particularly the strain associated with the recent outbreak of the influenza A H1N1 virus, also known as swine flu. The company has formed a special 24-hour-a-day task force across key business units within Life Technologies to coordinate the company-wide response to global requests for assistance with the outbreak. The task force is leading efforts to provide health agencies with front line support such as instrument training, managing the supply chain to ensure that products get to customers as quickly as possible, and ensuring appropriate regulatory compliance. Also, Life Technologies is accelerating the manufacture of components that will be used by laboratories to test for and identify influenza.
More speculative stocks, which have already doubled, include two makers of flu vaccines that are still being tested, Novavax (NVAX) and Biocryst (BCRX). Also speculative is SInovac (SVA), the Chinese vaccine company.
We predict that the stocks that have climbed the highest and fastest will drop the most over the next few days. Chasing hot stocks as they climb on fears is a losing game! But if solid stocks like Gilead and Kimberly Clark pull back a bit, that might present a buying opportunity. Sinovac may also present a good opportunity.
April 27, 2009 • Good Company/Bad Company
Bigger is Not Better: A Look at the Best Performing Stocks
It’s always enlightening to see what kinds of stocks perform best over the long term. It’s usually a surprise to those who don’t keep track. There are no big Blue Chips here, with most actually small caps. The key here is innovation.
So here is a list of the top 10 performing stocks over the past 10 years, courtesy of Motley Fool. It’s interesting to see how many of them are green companies. The top performer is Hansen Natural, the maker of energy drinks, while no. 5 is Green Mountain Coffee Roasters, one of my favorite companies. I usually place several orders with them for Christmas gifts because they emphasize fair market coffee growers and return some of their profits to help farmers and environmental efforts in emerging markets. Number six is Deckers Outdoors, the makers of those popular Uggies (who would have predicted a craze for fuzzy boots?).
You’ll see one of the stocks we mentioned here several months ago, and which we still like, even after a solid gain while other stocks were dropping: Almost Family (AFAM). Sorry we weren’t online ten years ago to recommend the stock then!!!
Company Return, 1999-2008
1.Hansen Natural (Nasdaq: HANS), 4,801% gain
2. Celgene (Nasdaq: CELG), 4,167% gain
3. Quality Systems (QSII), 4,002% gain
4. Clean Harbors, 3,953% gain
5. Green Mountain Coffee Roasters (Nasdaq: GMCR), 3,786% gain
6. Deckers Outdoor (Nasdaq: DECK), 3,374% gain
7. Almost Family (Nasdaq: AFAM), 3,122% gain
8. XTO Energy (NYSE: XTO), 2,992% gain
9. Southwestern Energy (NYSE: SWN), 2,911% gain
10. FTI Consulting, 2,907% gain
December 26, 2008 • Good Company/Bad Company
The Pessimist’s Poorhouse Portfolio
We’ve been hearing some dire predictions for the economy in both the near term and long term. Some are predicting a long, deep recession, while the most pessimistic pundits are even beginning to use the D word: a depression. In any case, there’s not much good news on the horizon, so we’ve decided to put together a portfolio for hard times. We don’t necessarily recommend these stocks, but if we are indeed in the middle of a long trough, there are certain stocks that should survive a long downturn better than others. We’ve included some typical bear market stocks and added others that we think might be new additions to hard-times stocks.
The Education Refuge: During downturns, when jobs are being lost, some job seekers decide to upgrade or retool their skills. There are several purveyors of education that have done well so far during the downturn, but the one that appears strongest to us is Apollo Group (APOL).
Sticking to Soup: A staple of a downturn would seem to be soup, but Campbell’s (CPB) most recent report was poor. We think a better alternative would be Ralcorp (RAH), which turns out even cheaper canned soups and vegetables that are sold under the names of supermarkets, etc.
Divine Discounts: The discount stores are all faring better than upscale and middle-class purveyors like Nordstrom’s and Penney’s. There are four contenders in this category, BJ’s Wholesale Club (BJ), Wal-Mart (WMT), Costco (COST) and Dollar Tree. We simply can’t bring ourselves to choose WalMart, as we think the company has a dreadful record in the way it treats its employees, and we love shopping at Costco. But we think the best bet in this group, based on recent reports, is BJ’s.
Quick Stops: Another category that is doing well during the downturn are the convenience stores, largely because gas has gotten cheap and folks are buying small amounts of food and snacks along with the gas. Pantry (PTRY) has the best balance sheet in this category. We’ve added this one to our Fairest Shares Portfolio.
Still Need Soap: Some pundits are pushing Proctor & Gamble (PG) as a recession-proof stock, since we all want to stay clean, even when we’re sweating the economy, but I like the looks of Church and Dwight (CHD) better. Baking soda, its mainstay, is still really cheap. And another of its products, Trojan condoms, would also seem to be recession-proof.
Lipstick on a Pig: You can’t put lipstick on a pig, making anything pretty out of this downturn. But women are going to keep buying lipstick, and we like Revlon’s cheap prices and the stock’s cheap price. (REV)
Store It: Folks who are losing their homes or having to downsize are stashing their possessions in storage units. These units fill up when homes and apartments go empty. Public Storage (PSA) has just had a recent jump in price, but its fundamentals look strong.
Pawn it: EZCorp (EZPW) has held up well so far, and it will benefit from the pawn shops it bought in Las Vegas, which are undoubtedly seeing a lot of bling these days as the casinos are hurting.
December 01, 2008 • Good Company/Bad Company
Considering Coach: Which is the Better Buy, the Stock or the Purse
We noticed recently that a blogger on the Shine Fashion site was asking about what her fellow Shine shoppers thought of the new fall line of Coach handbags. She particularly liked the new Bleecker Leather Patchwork Tote, which retails for $499, and she was thinking of buying one.
So let’s play the Devil’s advocate, for a minute. (Or should we say Devil-Wears-Prada advocate?) Let’s say that she buys the new Coach bag for $499, instead of saving the money or investing it. It may cheer her up as she carries it to the office. But the thrill of new stuff does seem to wear off fairly soon, at least for some of us, and we start taking those splurges for granted. Just another handbag or snazzy pair of shoes that hurt our feet.
But what if she had decided to invest the money instead, and spend $499 on Coach company stock? The shares of Coach closed at around $29 today (August 28 th ), so she’d be able to buy about 17 shares of Coach for the same price as the handbag.
Let’s look ahead a year from now. The Coach bag is getting a little worn from use (that is, unless it winds up in the back of the closet). But what’s happening to the stock? Let’s say that it rises about 8%, which would be an average gain for a decent Blue Chip stock. So next year, instead of a fairly worn handbag, she’d have $540 worth of stock. And let’s take it ahead to three years in the future, when the stock would be worth $630 if it continued that average 8% gain. And in five years, instead of the Coach bag, she’d have around $734, assuming again that average 8% gain.
Which would you rather own, a 5-year-old handbag, which you might be able to sell on ebay at a fraction of its value, or more than $700 worth of stock that you can sell?
Of course, stocks are never a sure thing. And when you look at a stock, you want to be sure you’re getting a bargain, just the way you would when you’re looking for handbags. So try taking a look at Coach stock by going to the Yahoo Finance site and typing in the stock ticker symbol, which is COH or just click on this link. You’ll see all sorts of information, including what stock analysts think of the stock. Scroll down the left side of the screen and click on Analyst Opinions. Take a look at the numbers, and you’ll see a target price for the stock, which is the price that analysts think the stock will reach within a certain period of time.
As of Aug. 28th, you’ll see that the average target price for Coach is $35, with some target prices even higher. That would make it a 20% markdown at its current price of $29. So you might be looking at a bargain, if you think that Coach is going to continue to grow. And here’s where your eye for trend-spotting comes in. Are your friends buying Coach handbags? How crowded is your local Coach store? My sister tells me that women in her town are knocking each other over to get to the counter when Coach bags go on sale.
So now you can see how easy it is to start stock-watching when you go shopping. And why you might enjoy looking for stock bargains for your portfolio as much as you do finding a fabulous purse that will accent an outfit.
Happy shopping! And remember, this is not a recommendation to buy or sell Coach stock, but rather a sample of trend-watching to get our fellow bargain hunters to think about investing.
August 28, 2008 • Good Company/Bad Company
A little trend-watching by the pool
We were watching the Olympic trials for the U.S. swimming team, and we noticed that nearly all the competitors, male and female alike, were wearing a new kind of Speedo suit called a LZR Racer that makes them look like dolphins, very sleek and streamlined. Always looking for trends, we went to the Speedo Web site to check out the suits, which are super high-tech. We were looking for a little gold ourselves for our portfolios.
A call to Speedo revealed that you can’t actually buy them yet (unless you’re an Olympic contender!), but they can be pre-ordered for delivery in October. They’re quite expensive, $475 for the women’s full-body suit and $550 for the men’s. On the Web site, you can watch a video of international journalists trying out the suits and ooh-ing and ah-ing over them. One of them says the suit makes him feel like a torpedo!
Speedo, as it happens, is part of a company called Warnaco Group (stock ticker WRC), which also makes and/or distributes “intimate” apparel and sportswear, including the labels of Calvin Klein, Chaps, Warner’s and Olga. Several analysts like the stock, and it has a target price (the price it’s expected to reach) of between $55 and $65. Its sales dipped in the last quarter, but they are expected to pick up later in the year. What we needed to know is whether the Speedo suits will give the stock an extra boost, even though they are such a small part of this company’s large holdings. The suits apparently give the swimmers an edge, so maybe the stock?
Even though few of us who just do some laps in our backyard or local pool will spend so much on a bodysuit, Speedo has already gotten a boost in their sales in the U.S. that their executives attribute to the “halo” created by the LZR. Speedo’s market share in performance swimwear this year through June 14th was up seven percent, at 61%, while Nike fell nine points to 11 percent, according to SportsOneSource, a market research firm.
We were wondering if Warnaco would get a further boost. We could wait until the Olympics are over and ask the question then, after the whole world has had a chance to see the suits. But then the stock might already have gotten the boost we think it might if the trend catches on. But that boost also depends on whether the swimmers wearing the suits actually win and set some records. So we’ll leave this up to you market-swimmers out there, whether or not you think Warnaco will start taking off when the starter guns go off.
Update: On August 7th, the day before the Olympics, the makers of the LZR have already gone gold. Warnaco Group had a boffo earnings report, and the stock climbed 8%. And still another company involved with the LZR also got a boost with their report. We found that there was in fact another company that was the secret behind the LZR. Actually, it’s a maker of software rather than swimwear: Ansys (stock ticker ANSS). Ansys makes 3-D simulation software, and their software played a critical role in the development of the LZR. The technology was used to predict fluid flows around the body of an elite swimmer in the outstretched glide position (assumed immediately after the initial dive and following each lap’s turn off the pool wall) to identify areas where drag, and its slowing effect, is likely to occur. In addition, the simulation analysis guided placement of specially designed drag-reducing panels to minimize this negative effect.
Ansys software is not ordinarily used to design sportwear: It’s used to design such things as aircraft wings that reduce turbulence, drug-coated artery stents that disperse drubs more evenly in the bloodstream, trucks that travel faster and with less vibration.
We looked into the fundamentals of the stock to see whether it merited more attention, and found that it has shown rather startling growth over the past years. It has met or beaten forecasts by Wall Street analysts for ten years, and its sales last year were up over 100%. Sales so far in 2008 are up 150%, on an annualized basis. The stock was up as much as 10% on their earnings report. So a little trend-watching by the pool can pay off, as we suspected.
So what do analysts think of the stock? You can look for yourself on the Yahoo Finance site, using the stock ticker ANSS and scrolling down the left side of the screen until you find the button for Analysts Coverage. You can get their average opinion as well as price targets for the stock, as well as lots of other information.
August 07, 2008 • Good Company/Bad Company
The Downdraft Effect: When Good Companies Go Bad
The market can sometimes behave like a barrel of apples, so that when one or two go bad, the rotten spots tend to spread. What we’ve seen over the past few months is a few bad apples, in the form of investment banks, going bad. Bearn Stearns, widely considered the most ruthless of the investment banking firms, has already gone with the wind. And we’re witnessing yet another firm in the process of toppling. Or at least tipping precariously, like the Leaning Tower of Pisa.
Bad news has begun leaking out of venerable Lehman Brothers, a firm we once admired and whose advice on stocks we valued. Lehman Brothers (LEH: NYSE), whose business model resembles that of Bear Stearns, appears to be among the most vulnerable of all the investment banks. The severity of its problems had not come to light earlier because of the rescue policy of the Fed, which instituted a lending facility allowing the investment banks to temporarily swap their “alphabet soup” assets for Treasuries. These so-called alphabet soup assets — mortgage-backed securities (MBS), asset-backed securities (ABS), collateralized loan obligations (CLO), and others — had been sinking the investment banks.
The Fed’s actions may have forestalled a modern-day “bank run” on Wall Street. But the Fed has not solved the bigger, longer-term crisis. And it doesn’t protect the vulnerable shareholders of Lehman Brothers, who will have to absorb the losses on the securities Lehman swapped temporarily for treasuries. The more leverage — or debt — a company employs, the quicker shareholders get wiped out when assets go bad. And unfortunately, Lehman has huge liabilities in comparison to its actual equity. This is called being leveraged to the hilt. Lehman is scrambling to reduce leverage and raise capital by selling illiquid assets into a weak secondary market. Unfortunately, illiquid mortgage-backed securities aren’t a particularly hot item these days. There are few buyers for such assets — even at steep discounts.
Lehman management has not been terribly forthcoming about reporting quarterly losses and write-downs, and some observers are saying that “fuzzy math” produced Lehman’s “strong” March earnings report that kept the stock from falling. Until now. Lehman is still facing the likelihood of losing tens of billions of dollars over the course of the next few years. As losses pile up, Lehman will have to raise capital. That means flooding the market with LEH shares. Lehman may have to issue hundreds of millions of new shares at a discount to rebuild its capital shortfall, severely diluting the existing shareholders.
We were expecting Lehman’s troubles to hit the market around mid-June, when the company issues its next earnings report, but it looks as though the bad news has gotten out sooner. So the substantial market dip we were anticipating appears to be happening already, in dribs and drabs. Better to let the air out of the balloon a bit at a time, perhaps.
June 03, 2008 • Good Company/Bad Company
Green Investing: Sustaining Our Values
You’re going to be hearing a lot about values on this Web site. Of course, we should all be using our VALUES guide to stock shopping. (Members can download our VALUES shopping guide from the home page.) We’ll be talking a lot more as we go along about how to use these measures in determining whether or not a stock is a good buy. We also talk about “value” stocks, meaning stocks that are in fact “undervalued” by the market and therefore represent a bargain.
But we are also concerned about values in a broader sense when we think about buying stocks. For many stock traders, a stock is essentially a collection of numbers or vectors on a chart. For us, stocks represent the people, products and policies of a company that have an impact not only on employees, customers and stockholders, but also on the world at large, whether it’s health, environment or quality of life. We want to invest in companies whose leadership supports the elements of social responsibility and environmental sustainability. That doesn’t make us treehuggers (though we do love trees), but simply practical investors. Companies engaging in unethical practices, whether it’s polluting, making unsafe products, cheating on their balance sheets or mistreating employees, usually get caught, and shareholders bear the brunt of the punishment. That’s why we’ve chosen the motto: “Investing without losing your sleep, your shirt or your soul.”
Fortunately, we’re hardly alone in that view. The notion of “socially responsible” or “sustainable” investing has been growing rapidly, and there are now dozens of mutual funds that are designed to reflect certain “values.” In fact, socially responsible investing, or SRI, was first formally practiced from a “moral” point of view, with investors avoiding companies that dealt in alcohol or tobacco. Nowadays, SRI has more to do with sustaining a healthy environment, thus avoiding companies that pollute or add to global warming and seeking out companies that not only perform well financially but that rate positively on social and environmental factors.
There are several fund families and investment firms that use this sort of screening in deciding which companies to include in their portfolios. One of the best known of these is Pax World Mutual Funds. This fund family even has a fund focused on supporting the equality of women, called the Women’s Equity Fund (PXWEX), though we saw that the fund’s second largest holding is BP (British Petroleum), which we regard as one of the worst companies around in its environmental and worker safety policies.
The Spectra Green Fund (SPEGX) seems to do a better job of screening, and it has outperformed the S&P 500 index by 10% over the past year. The fund’s top holding, Cummins (CMI), seems a bit puzzling at first, since the company makes diesel engines. However, Cummins makes energy efficient diesel engines and has made strides in decreasing the pollution from its engines, so we can see how it would make sense from a green point of view.
Nevertheless, the inclusion or exclusion of companies from many of these funds seems rather arbitrary, and we prefer to do our own screening. If we’re thinking of buying shares in a company, part of our due diligence in researching the company is doing a Google search on the company for recent news and a search combining the name of the company with “environmentalists” and “lawsuits.”
For those looking for a “green” substitute for an index fund that tracks the S&P, we like the ETF (exchange-traded fund) that tracks the KLD Select SocialSM Index. The stock ticker symbol is KLD. The index is created by KLD Research & Analytics, Inc., a leader in social investment indexes. KLD’s Select Socialsm Index is the first ever created for institutional and retail investors who seek broad diversification and increased exposure to companies with strong sustainability characteristics, such as environmental management, human rights, product quality, and other indicators of good corporate governance and social responsibility. The Index addresses one of the principal barriers facing socially responsible investment: the reluctance of institutional investors to adopt SRI strategies because of their desire for diversification across the market. Many institutions believe that traditional SRI screening that excludes industries such as nuclear power, gaming and defense introduces additional risk into their portfolios. For some institutions, the scale of their assets forces them to be “universal” investors. The KLD Select Social Index responds to these concerns by including companies representing every industry (except tobacco), weighting them based on their relative social and environmental performance, and explicitly limiting risk exposure. The Index enables investors to incorporate social and environmental factors into their investments and enables them to influence corporate behavior with a broad spectrum of large cap companies through shareholder engagement.
We don’t think that focusing on “values” in the larger sense keeps us from doing well in the market. The most promising use of SRI screening we’ve seen is in the area of alternative energy. The Market Vectors-Global Alternative Energy ETF (GEX) has been strongly outperforming the S&P 500 index as well as the regular energy index. This ETF includes five industry sectors: alternative energy resources, distributed generation (energy from many small sources rather than large central ones), environmental technologies, energy efficiency and enabling technologies.
March 28, 2008 • Good Company/Bad Company