Green Machine

As part of the government’s second round of stimulus funding, President Obama has proposed spending tens of billions of dollars with an eye on doubling US production of alternative energy over the next three years.

Key components of his plan include retrofitting and weatherizing 75 percent of government buildings and as many as two million private homes to make them more energy efficient, as well as developing and implementing a national smart grid and more than 3,000 miles of transmission line to make sure energy is distributed when and where it’s needed.

This effort also entails spending billions of dollars on research and development efforts; if all goes to plan, as many as 460,000 new jobs could be created.  

With all that money flowing, alternative energy is no longer a sucker’s bet.

One of the best ways to play the coming flood of government dollars is New Alternatives (NALFX). Launched in late 1982 as the first environmental mutual fund in the US, it’s managed by the father-and-son team of Maurice and David Schoenwald, both former attorneys.

The fund’s 48 holdings include names from outside the green energy space. Energy-related stocks account for 35 percent of assets. Other industries represented include organic food production, utilities, and those involved with alternative energy installations and infrastructure. The fund is also geographically diversified; less than 40 percent of assets are invested in North America, the remainder in Europe and Asia.

Among New Alternatives’ most interesting holdings is Indiana-based WaterFurnance Renewable Energy (TSX: WFI, OTC: WFIFF), which manufactures geothermal heating and cooling systems for homes and small commercial applications. Quarterly earnings for WaterFurnace are a bit choppy–the bulk of its orders come prior to the start of the traditional construction season. But on an annual basis revenues have demonstrated consistent high-single-digit growth.

Sales are likely to grow even faster in 2009 following the passage of the Energy Improvement and Extension Act late last year. Under one provision of the bill, new installations of WaterFurnace’s systems qualify homeowners for a one-time tax credit equal to 30 percent of the total investment. New commercial installations earn a 10 percent credit.

Those incentives along with others expected to be part of the Obama plan should create greater demand for geothermal systems. And that’s good news for WaterFurnance, one of the leading providers in North America.

One drawback to that approach is that it limits investors’ benefit from heavy investment by the US government, but on the plus side it boosts exposure to countries that have already demonstrated a proven commitment to combating global warming and have steadily invested in related industries over the past several years.

And that broad brush approach has helped the fund generate double digit returns in most years.

Last year wasn’t kind to New Alternatives. It lost more than 44 percent, but that was more a function of investor negativity about technology-related small-cap stocks in the midst of a recession. That type of environment isn’t kind for companies of that ilk; New Alternatives’ only other negative year came during the 2001 recession.

The fund comes with a dear 4.75 percent front load, but its overall expense ratio of 0.95 percent is reasonable for a green fund. That’s primarily a function of its large asset base of $177 million, one of the side benefits of being the oldest environment-focused fund. –Benjamin Shepherd

WHY TO BUY

NEW ALTERNATIVES (NALFX)

*Long a priority in Europe, alternative energy is just catching on in the US

*Billions of dollars will be pumped into “green” industries under the proposed stimulus package