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In the effort to help the world's environment, investors are finding that it's easy being green. Maybe too easy.
So-called green investors are bidding up shares of companies involved with alternative energy and environmentally friendly products and services, and scooping up initial public offerings of promising "clean tech" ventures. Even giant multinationals with environmental credentials merit consideration.
"It was just a year ago where we would have somebody arguing with us over whether or not the market would ever favor green investing," says Jack Robinson, a co-manager, with Matt Patsky, of the Winslow Green Growth Fund (WGGFX). "What a difference a year makes."
Indeed, some green-fund managers now see the share prices of many companies tied to environmental sustainability as, well, unsustainable. "Now you've got to worry about valuation and some of the speculative bubbles that are building," Robinson says.
Some socially responsible mutual funds apply rigid environmental tests to their stock holdings, and they have been standouts in their groups.
For example, the Portfolio 21 Fund (PORTX), which has a global reach, rose almost 31% in the 12 months through July 9. Meanwhile, the Sierra Club Stock Fund (SCFSX), a large-cap-growth offering, added 18%.
These funds have performed well, of course, because many of their growth-stock holdings have fared even better. Solar energy bellwether SunPower (SPWR, news, msgs), for example, was up 158% in the past 12 months, as of July 9. Environmental control company Fuel Tech (FTEK, news, msgs), which helps utilities burn coal more efficiently, had risen 182%.
Such burning returns across the sector are flashing a yellow light to green investors.
"I'm certainly concerned that you have too much hot money moving in," says Eric Becker, a co-manager of the Green Century Balanced Fund (GCBLX), which keeps about two-thirds of its portfolio in stocks and the rest in bonds. "There are investors who are going to get burned."
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Adding fuel to the speculative fire, the value of clean-energy related initial public offerings hit $4.1 billion in 2006, compared with $1.6 billion a year earlier, reports Lux Research, which also found venture capitalists pumping $1.5 billion into clean-energy firms last year, up 141% from $623 million in 2005.
"Some of the companies that are getting funded now are probably going to have long time horizons to reach profitability," Becker says. "There are others that are already profitable, and those seem to be getting pretty rich valuations."
Jerome Dodson, manager of the large-cap-growth Parnassus Fund (PARNX), says he'd like to commit more of the socially responsible portfolio to alternative energy firms, especially in solar generation and wind power. But the prices of these companies keep him from flipping the switch.
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The best 'green' stocksIf you've got the patience, companies that specialize in energy efficiency are your best bet among environmental stocks, says MSN Money's Jim Jubak. They aren't as flashy as uranium or ethanol stocks, so prices are still reasonable.
"Fuel cells and solar and wind are not really undervalued," Dodson says. "Although they may be positive from an environmental and social standpoint, they're really risky. We may be missing an opportunity, but this is not a speculative fund."
Cutting a wider field
Concern that the asking prices for some stocks now exceed their promise is altering the green investing landscape.Notably, companies that typically wouldn't be seen as environmental leaders are starring in social funds. These include large multinationals that are committing deep financial resources to conserving natural resources. These businesses have the added benefit of being profitable and more stable investments than, say, an upstart solar power provider. (See related story on alternative energy ETFs.)
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