IS IT TIME TO GO GREEN?

By Mark Rylance, CFP®

With all the recent media attention and confusion surrounding the government's proposed healthcare reform, it is sometimes easy to overlook other significant developments. One area that has taken a back seat of late, yet is very much a major topic for investors, is the evolution of “green technology”. We remain keenly aware of this growing trend and have continued to monitor it closely while looking for new investment opportunities.

For those who may not know, green technology is focused on the production of alternative “non-oil” energy sources such as solar, wind, geothermal, and biofuels. Over the past several years, this area has seen a great deal of activity and a lot of promising innovations. But how do we profit from this green technology? What risks are there to consider?

Before I attempt to answer those questions, let's first look at what drives a stock price up. Most experts would argue that stocks rise on the belief that profits will be higher in the future than what the market currently suggests. In other words, stock prices rise when the market has seemingly undervalued the future profits of a company. Up to this point, there have not really been any dramatic examples of where money has been made with these environmentally conscious companies.

I know it's recently been “cool” to support the environment and that it's tempting to invest in what is likely to be a profitable venture in the future. But has it been “cool” for the average Joe to shell out $20,000 for a new set of solar panels, which as an investment is unlikely to break even for at least 10 years? No, not really.

Recently though, some very interesting developments have caught our eye that lead us to believe this “green thing” may finally be gaining some legs, helping it become a legitimate growth industry. The epiphany for me came while Dick Crum was recapping a meeting he attended with other like-minded investment professionals in New York.

One of the speakers was Anthony Malkin, president of Wien and Malkin, who manages the Empire State Building in New York City. The owners of the Building had just begun a $500 million retrofitting project which included massive upgrades to the heating, cooling and lighting systems. All told, these upgrades are ultimately expected to reduce energy consumption by 38%. In other words, the Building is going green.

"We have a very deep commitment to sustainability,” says Tony Malkin. "Without applying sustainable practices in all aspects of our businesses and lives, we will greatly harm our future." Call me a cynic, but I suspect Mr. Malkin and his financial backers, in addition to being concerned about the environment, may also have a wee bit of interest in the financial incentives behind the project as well.

This is where our investment interest enters the picture. As a result of President Obama's “green” tax credits, companies can now support the environment and deliver returns to shareholders at the same time. A person familiar with the Empire State Building project has informed us that the owners will now be able to depreciate their upgrades in less than 5 years, as compared to the traditional 15+ years.

Think of the tax savings involved if you allow a company to deduct their costs three times faster. Profits should be substantially higher and realized sooner. This will also benefit suppliers on the project, such as Johnson Controls, Inc., the energy consultant, and Jones Lang LaSalle, the project manager. Evidence this could be a growing trend was supported by a recent announcement of a plan for the Sears Tower in Chicago to undergo a $350 million green renovation that intends to reduce electricity costs by 80% while saving 24 million gallons of water annually.

Most importantly, however, the biggest winner of the bunch may be you and I as consumers. As corporate America starts reducing costs (and making money) by being environmentally responsible, that will serve to drive down the overall cost of products and services. Someday soon we may be able to outfit our house with solar panels for a mere fraction of the cost today. This is pretty exciting stuff.

Just as the race to the moon in the sixties fueled the computer age, and ultimately the technology boom, so too may environmental tax credits fuel the green movement. But keep in mind (to use a baseball expression), that for every “home run” investment there are all too many “strikeouts” along the way.

At RS Crum, we will continue our search for new investment opportunities to profit from, while continuing our approach to safeguarding your investments.

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