Tuesday, June 14, 2011
Busting "Clean" Myths
You may be passing so-called “clean” companies for investment over on the grounds that technologies aimed at cleaning up our environment are too early stage and are not ready to be turned into a product. Such companies are not profitable and are research and development money pits that leave investors broke. Renewable energy still requires government subsidies and support. As such it is too unpredictable. If they are public the stocks trade by appointment and never appreciate in value.
In this post I would like to give you a few examples that demonstrate there are clean products fully launched off the development bench that are turning profits and offer strong investment alternatives. The clean sector deserves your attention and your investment dollars.
Myth #1 - Clean technologies are not marketable.
Recently I had a chance to meet with the management team of a company called Pureti. It is a privately-held, American manufacturer of a proprietary surface treatment using light activated water and titanium to turn most any material into a self-cleaning and air-purifying surface. Materials treated with this product actually eat grime, mold and aromas in the presence of light.
The technology is called “photocatalysis” or photocatalytic oxidation. It is not hard to understand. It is the reverse of photosynthesis. Light provides energy for plants to create organic matter, all of which contain carbon, hydrogen, oxygen and nitrogen. That’s photosynthesis. Photocatalytic oxidation is also a natural process whereby light energy hits a mineral - titanium dioxide - and triggers a chemical process that oxidizes or breaks up organic matter at the molecular level. The by-products are water and carbon dioxide.
Because the titanium dioxide, the active ingredient in Pureti’s product, does not get used up in the process, one application is good for some time. It actually works better when there is less light, so even the north sides of buildings or cloudy days are not a challenge to the efficacy of the product.
The most interesting application of the product so far is on existing asphalt. An independent researcher in
has found that an application of Pureti’s product reduces NOx by 80%. Its greatest feat may be in the health care field. Used in conjunction with germicidal lamps used in hospitals, it increases germ killing power by 100 times. New Orleans
The company has patented its process and has sold it product in several verticals. Its value-proposition is enhanced by the fact that one application, which is sprayed on the surface of just about anything, works for about three to five years.
There are so many opportunities and Pureti has had so many inquiries, it has had to set some priorities for the near-term. It is working with manufacturing partners in three initial markets: 1) retail products such as glass wipes, odor eliminating curtains; 2) materials such as tiles, textiles, roofing, window glass and vehicles; 3) building and road construction. Pureti is already working with Boeing, and Ford, among others. I was impressed when I met the management team and not just because I had a glass of wine in my hand. They are a highly focused group and have a practical approach to what is clearly a wide field.
If privately-held companies are beyond your reach or outside your risk threshold, consider a few ideas in the public company space. There is little disagreement anymore that we need to reduce our dependence upon imported fossil fuels. The political and environmental risks are just too high to continue importing large amounts crude oil, in particular. Bringing alternative fuels to the scale to replace oil has been a challenge.
Myth #2 - Clean companies are not profitable and their shares are illiquid.
A small company called MagnaGas (MGNA: OTC/BB) has not been intimidated. The Company uses recycled liquid waste like sewage or used oil to produce a hydrogen-based fuel. It can be used as a fuel for hand tools, as a fuel in small machinery like fork lifts, generators or cars, or in heating systems. The patented MagnasGas process is called Plasma Arc Flow and produces a gas that is interchangeable with natural gas. It is approximately 65% hydrogen, so produces significantly lower green house emissions.
No doubt there are skeptics who will read this and roll their eyes. You have heard the sludge to gas station story before. You know it all sounds good on paper until you get to the net profit line and find there are no profits.
MagnaGas management is just a bit shrewder than that. They have first targeted the metal cutting market where they can produce and sell their gas at a profit. The metal cutting industry is not particularly glamourous, but it is currently spending about a billion dollars a year on very nasty, toxic acetylene to power hand-held cutting torches.
When I met management one of their sales people described how he spent a day meeting metal working companies at a trade show. He had fifteen appointments and got fifteen orders. MagnaGas is far less toxic and less expensive that acetylene. It is completely interchangeable for acetylene and requires no investment in special equipment. The sales pitch is nice and easy.
MagnaGas managed to break even in their last fiscal year and management expects to be cash flow positive going forward. Its next target markets are the home water heating market and natural gas powered cars, which together are valued at about $14 billion. The company expects the same value proposition for these two industries as they have been able to offer MagnaGas as a substitute for acetylene.
Now MagnaGas is public and I think it does demonstrate that clean can mean profitable. I concede it does trade by quotation on the OTC/BB. So for those of you who find micro-caps like MagnaGas just too risky, lets move to the other end of the capitalization spectrum to Valero.
Myth #2 - Larger public companies may be fundamentally sound, but they are stuck with legacy operations and will never be “clean.”
You might recognize Valero Energy (VLO: NYSE) as one of the largest oil and gas refiners in the
Why would I advocate a company deep in the oil and gas industry? Valero has made significant investments in renewable fuels, beginning with a very smart purchase of several ethanol facilities back about four years ago when the ethanol industry began to crumble and go bankrupt. Most recently they announced plans to augment one of their refineries in U.S. to produce renewable diesel from chicken fat. Louisiana
Do not roll you eyes here. Valero is planning to produce renewable diesel from chicken fat. Not only that, they are playing for it themselves. Valero was approved for
government loan guarantees, but decided that government involvement made the planning process too unwieldy. Valero knows what needs to be done and they are using their own money. U.S.
Myth #4 - There is no such thing as a profitable, strong public company with “clean” products.
If you are too green to invest in a fossil fuel company like Valero, consider its joint venture partner Darling International (DAR: NYSE) instead. Darling is a food by-products recycler. It is collector of animal parts from meat packing plants not used for human food, bakery products that do not make it to store shelves and used cooking oil from restaurants. It processes these unwanted organic materials and resells it for use in the pharmaceutical industry, animal feed, and yes, the biofuel industry. It is a new age upstream fuel producer.
No upstart, Darling has a lengthy history of operation with a national footprint. It has achieved that important $1 billion market in revenue and has a track record of strong profits and cash flow generation. It trades ample volumes on a national exchange. What is more it is 100% “clean.”
These four ideas prove that it is possible to invest in clean without having to accept unpalatable risks associated with unproven technology or lack of profits. What is more, the “clean” investment can also mean companies of size and reputation.
Speech presented June 14, 2011 at
Society of Securities Analysts. New York
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a Hold rating on DAR. Pureti is included in Crystal Equity Research’s The Mothers of Invention Index in the Materials Group. DAR and MNGA are included in the Beach Boys Index in the Renewable Diesel and Biofuel Groups, respectively.