Energy Efficiency Investments
Stimulus Already Creating Stock Winners
This is a partial list of funding objectives outlined in the just-signed stimulus; see if you can identify a theme:
$2.5 billion for energy efficiency and renewable energy research
$1 billion energy efficiency programs including energy-efficient appliances and trucks and buses that run on alternative fuel
$4.5 billion to boost the energy efficiency of federal buildings
$6.3 billion for energy efficiency and conservation grants
$5 billion to weatherize old buildings
$2.3 billion in tax credits for energy efficiency technology manufacturers
The theme, in case you missed it, is billions of dollars for energy efficiency. In fact, the $21.6 billion being set aside for efficiency measures works out to about 3% of the $787 total package.
Not bad for a sector that was recently dismissed as "laughable of course"—a point my colleague Sam Hopkins touched on a few weeks ago.
Of course, wanting to use less power to do the same things isn't "laughable" by any stretch of the imagination. It's actually quite a smart way to reduce energy demand instead of expensively increasing supply with new generation assets.
And if you understand the different approaches to energy efficiency, along with the companies involved, it can actually be a very profitable investment vehicle.
Like it or not, taxpayers—both present and future—are now on the hook for a rather large tab. So exploiting the stimulus' effect on the market by investing in the sectors it designates as winners is not only prudent, but critical.
Investing in Energy Efficiency
There are two main approaches to energy efficiency on a large enough scale for investors to profit.
The first is the classical sense of the term: doing more with less. This can be accomplished by upgrading a building's thermostat to a digital model that adjusts energy use in real time, by installing energy efficient lights like compact fluorescents and light emitting diodes (LEDs), or simply by switching driving habits to get more miles per gallon.
Obviously, there's more money in some of those approaches than others. But that doesn't mean they're not all good ideas.
Take energy efficient lighting, for example. Just this morning Energy Focus (NASDAQ: EFOI) announced it was selected as an official "GSA Schedule Contractor of energy efficient lighting projects for Federal stimulus package projects."
The stock popped nearly 40% in early trading this morning, before settling in to more sustainable 11% gain—a perfect example of both energy efficiency's investment potential and how investors can use the stimulus for profit.
Take a look at a chart of that stock for the day compared to the struggling DOW:
There are long-term, diversified approaches to investing in energy efficiency as well. Systems providers like Honeywell (NSYE: HON) and Johnson Controls (NYSE: JCI) are two stalwart plays in the sector.
By taking this approach you can leverage the stimulus, and the private capital flow it will incite, to boost the bottom line of your portfolio.
Taking personal steps, like turning off lights when not in use or throttling back your hot water heater, while not directly beneficial to your portfolio, has a positive impact on your bottom line as well.
But the real ground-floor investment opportunity is in an emerging sector dubbed...
Not to be confused with energy efficiency, demand response is the reduction of demand in response to rising prices or inadequate supply.
This has become a favorite technique of utilities because it is more easily implemented than efficiency measures and it prevents them from having to construct costly peaking power plants fired by coal or natural gas. (Which will grow even more expensive once cap-and-trade legislation is implemented.)
Utilities contract with demand response companies that install electricity monitoring software and communication hardware in participating customers' homes. These devices aggregate power that is drawn by reducing demand from hundreds of HVAC systems and noncritical industrial machines.
The demand response company, like Comverge (NASDAQ: COMV) for example, is paid by how many reduced megawatts they direct back into the grid. Customers are often compensated or credited for the power they allow to be drawn from their homes or businesses.
What's more, manufacturers of this technology are now eligible for a 30% tax credit for certified projects thanks to the new stimulus. The bill calls for up to $2.3 billion in such credits, which will make the relevant companies all the more attractive to investors.
Be sure to pay attention to this sector as the stimulus provisions are implemented and digested by the market. You should be leveraging their effects for all they're worth.
Call it like you see it,
PS. Readers of the Alternative Energy Speculator have been preparing their portfolios to reap the stimulus' benefits for months. We're tackling this thing from all sides, from water infrastructure plays to demand response companies like those mentioned above. Take a moment to learn how you can take part in the action. The bill may have already been signed, but today's market sell-off has exposed a perfect buy-in opportunity for the stocks that will emerge as winners.
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