How you can go green like Buffett
Posted
May 28 2009, 02:23 PM
by
John Reese
Rating:
Warren Buffett made a big splash last fall with his electric car bet. Since then, he's continued to talk up BYD Auto, the firm in which Buffett's Berkshire Hathaway (BRK.B) took a 10% stake, and recent reports that Volkswagen (VLKAF) is now turning to the Chinese company for battery help are keeping the Oracle of Omaha in the "green" spotlight.
Buffett's eco-friendly bet got me wondering whether any other "green" stocks pass muster with the Buffett-inspired Guru Strategy computer model I use on Validea.com (which has returned 15% this year while the market remains in the red). The marriage of green stocks and the Buffett method is an odd one -- the strategy looks ten years back into a company's fundamentals to find stable, consistent firms, while green companies remain relatively new and, in many cases, unproven.
Nevertheless, I did find a couple green plays have what it takes to get some interest from my Buffett model.
First off is Clarcor (CLC), a Tennessee-based company that provides filtration products and services to industrial/environmental firms and vehicle and heavy equipment manufacturers. It has also partnered with three other companies to form BioProcessAlgae, which is working on a multi-million-dollar government-funded pilot project that will harness algae as a source of alternative energy. In addition, Clarcor in 2008 took a 30% stake in BioProcess H2O, a Rhode Island firm that makes water reuse filtration systems.
My Buffett model requires firms to have decade-long histories of consistent earnings growth, and Clarcor delivers. The $1.5-billion-market-cap company has increased earnings per share in every year of the past decade, which this model loves. It also has the kind of conservative financing Buffett has sought in past buys, with debt of $83.9 million and annual earnings of $87.7 million. It could use those earnings to pay off all its debt in less than a year, which the Buffett method considers exceptional.
Two more qualities Buffett is known to look for: strong management and a "durable competitive advantage". One metric he has used to measure both of those is return on equity. The model I base on his approach requires a firm to have a 10-year average ROE of at least 15%. Clarcor's ROE has been between 14.5% and 16.6% over the past ten years -- remarkably consistent -- with the average being 15.3%. That's good enough to pass this test.
One more reason the Buffett method likes Clarcor: its positive free cash flow of $1.08 per share.
The second green pick that gets good marks from my Buffett model is Ecolab (ECL), a Minnesota-based company that provides firms in more than 160 countries with cleaning, sanitizing, food safety and infection prevention products and services. Back in 2008, Ecolab bought Ecovation, which offers renewable energy solutions and management systems, focusing on U.S. food and beverage firms involved in dairy, beverage, meat, and poultry production. And Ecolab is also a member of the U.S. Environmental Protection Agency's Climate Leaders program, and has pledged to reduce U.S. greenhouse gas emissions by 20 percent per dollar sales from 2006 to 2012.
Like Clarcor, Ecolab has the kind of predictable earnings that my Buffett model seeks. It has increased EPS in nine of the past ten years, with the lone dip coming eight years ago. The firm could also pay off all its debt ($797.9 million) in just over two years based on its annual earnings ($385.6 million), another good sign.
Ecolab has also been doing good work with shareholders' money. Its average ROE for the past ten years is 21.5%, easily enough to pass my Buffett-based model's 15% minimum. The company also has $1.20 in free cash flow per share, passing another Buffett method test.
The green energy movement is still evolving, and not doubt has a ways to go. But the two firms I've mentioned here have remarkably long records of success for companies in this relatively new field. If you're looking for some solid green plays, they could be a good place to start.
No long positions.
John Reese is founder and CEO of Validea.com, a premium investment research site, and Validea Capital Management, a separate account advisory firm. He is author of the new investing book, "The Guru Investor: How to Beat the Market Using History's Best Investment Strategies".
