Shorting The Least Green Companies

Newsweek recently released its 2009 Green Rankings for America’s 500 largest corporations.  Investors would do well to examine the bottom of the list, as well as the top.

Tom Konrad, Ph.D., CFA

I’m getting more and more company in worrying about a market peak.  If you, like me, are 

1. Interested in green investing, and

2. hedging your exposure to a market decline,

you should probably also be interested in turning Newsweek’s Green Rankings upside-down,  and use some decidedly un-green companies as a hedge against the market risk of your greener portfolio.  

If you believe that green investing is likely to lead to long-term out-performance, then it is just a small step to believe that shorting distinctly brown stocks will not only spruce up your overall performance; it should be even more effective than buying green stocks.  

This is because there is generally more potential to out-perform the market on the short side than the long side.  Most investors are long-only.  If they feel a stock will go down, all they can do to express that sentiment is not buy it.  Similarly, analysts prefer to cover stocks that they like.  It is more comfortable to be on good terms with the companies that you deal with every day.  If you really think company X is a dog, wouldn’t it be easier to just cover company Y instead, rather than trying to get information out of hostile management?

Green investors looking to hedge their market exposure should therefore both do well and do good by shorting the bottom of the Green Rankings, an idea I first brought to readers’ attention in spring of 2008 with a list of stocks we love to hate.  Those stocks all fell, but so did everything in 2008.

Five Stocks to Short

The bottom of the green rankings is dominated by Utility companies.  These companies are generally regulated and must convince their regulators that their investments are "prudent."   The flip side of the bargain is that they are allowed to earn a return on any such "prudent" investments, even if those investments end up being quite foolish in retrospect.  Hence, utility customers are more likely to bear the costs of environmentally harmful investments than shareholders.  For instance, New York ratepayers are still paying the bill for the Shoreham Nuclear Generating Station, even though it never generated a watt.  If I could short my electric bill, I might, but barring that option, I prefer to look at other sectors for brown companies to short.

Fittingly, Number 500 on the list is coal company Peabody Energy (BTU), an another coal stock, Consol Energy (CNX) is number 496.  A strong carbon cap-and-trade policy will probably lead many coal-fired power plants to fuel-switch to natural gas, or to displace some coal by cofiring wood pellets, so these companies are a fitting part of a green’s short portfolio.

Also near the bottom of the list are food and beverage giants ConAgra Foods (CAG) and Bunge (BG), at 497 and 493.  Besides having no green credentials to speak of, ConAgra may be hurt if input prices rise as food is diverted to make biofuels, but Bunge, which has agriculture as well as food interests could actually benefit.

Number 484 is asphalt, aggregate, and concrete supplier Vulcan Materials (VMC), ready to supply the stuff needed to pave paradise and put up a parking lot.

I can’t say that I’m personally shorting any of these yet.  I may as I need to replace other short positions.  I generally use shorts (or short spreads) on general market indexes as the mainstay of my hedging strategy.  My few non-index short positions are mostly in the airline industry, which is exposed both to the economy in general, and oil prices in particular.  Newsweek lumps these into Media, Travel, and Leisure, and the worst scoring airline was Delta (DAL) halfway up the list at number 256.  

Of the five above, the one I’m most likely to short is Vulcan, because the company has exposure to the housing market (which I do not expect to recover for a long time), climate change, and peak oil.  Cement is a large contributor to global CO₂ emissions, and asphalt is a byproduct of oil refining.  As refiners install more crackers and other equipment to squeeze more liquid fuels out of a barrel of oil, it is at the expense of asphalt production.  

DISCLOSURE: Tom Konrad and/or his clients have short positions in DAL.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.