Canada’s Top Ten Cleantech Firms

Tom Konrad, CFA

Given the small size of its economy and rather lackluster approach to
climate change, Canada has many of the Cleantech stocks with the best
prospects.  Canadian listed firms come from a broad range of
sustainable sectors, and a lack of attention from United States investors means
that many trade at very attractive valuations.  Corporate
Knights‘ has picked ten of the best.

I’m often surprised at how many of my favorite green stocks are listed in
Canada.  This year, two of my Ten
Clean Energy Stocks for 2010 are Canadian listed.  The same was true
for my 2008
list, while my 2009
list contained three stocks from Canadian exchanges.  I mostly stick to
companies that are traded on North American exchanges, so it’s not surprising
that more Canadian-listed companies appear than, say, companies listed in Britain
(only one over three years.)  It’s also surprising that there are so many
Canadian listed firms,
given that Canada’s
economy is only about one tenth the size of the United
States’ economy.  Canada’s largest exchange, the TSX, has 3841 companies
with a combined market capitalization of about $1.4
trillion, compared to 3615 $10.8 trillion for the NYSE and 2249 at $2.8 trillion
for the NASDAQ.

The number of stocks on Canadian exchanges is key to the number of
great Cleantech stocks listed there.  While Canada’s relative market
capitalization parallels the relative size of the economy, the number of
Canadian listed stocks is about 2/3 of the number of stocks listed in the United
States.  Small companies often find that listing on the TSX is faster and
easier, and often comes with less burdensome reporting rules than a NASDAQ
listing [powerpoint
pdf.]  This means that American Cleantech investors interested in the
many new companies going public find ourselves with relatively few options on US
exchanges, while a bumper
crop of Cleantech IPOs heads towards Canada.

However, the less burdensome listing requirements for Toronto listed firms
are a two-edged sword: investors looking at these companies not only have to
sift through more of them, but they need to be more careful with the ones they
choose to consider in more detail.  Many investors decide the extra work is
not worth the bother, and stick to the relatively few US listed firms. 
Their reluctance is good for those of us willing to venture across the Northern
border and do our homework: a smaller pool of investors means we can often buy
these companies at much better valuations.

Sorting the Wheat from the Chaff

With many more Cleantech stocks to choose from, it helps to narrow down your
focus on a few companies before doing the many hours of due diligence that
should accompany any stock market investment.  I often start
with companies that are part of third party indexes.  Beyond that, I tend
to focus
on a few Cleantech sectors such as Energy
Efficiency Stocks, Clean
Transportation Stocks, and Electric
Grid stocks which get less attention than more popular
sectors such as solar.  

Companies in indexes have garnered enough shareholder attention that there
will decent liquidity.  This can be surprisingly important, even for a
small investor.  I became interested in a TSX-traded energy efficiency firm
over the holidays, did hours of due diligence, and even wrote an article. 
The stock typically trades 1,000 to 2,000 shares a day, and I have only been
able to buy 1700 shares at what I consider to be an attractive price.  I’m
waiting to publish the article until I’ve made my purchase.  Given that the
stock has risen since I bought it, I may never get the chance to buy more at the
prices that prevailed when I did my research.  Researching higher-liquidity
stocks means that you can get in when you want without greatly moving the
market.

The Cleantech 10^TM

Corporate Knights calls
itself "The Canadian Magazine for Responsible Business," and they
publish (in collaboration with The Cleantech
Group) an annual list of ten "technology-driven growth companies that have big impacts on resource efficiency and the environment—not simply those re-branding themselves as ‘green.’" 
By starting with a list like this one, I know I’m only looking at companies with
businesses I would like to own.  What I don’t know is if the stocks are
good values, if they strong financially, or if management has the skills
necessary to have them succeed against the competition.  These latter three
questions are the ones I try to answer during due diligence.   In
2009, their list outperformed
the TSX/S&P Composite by 38%.

They published the most recent Cleantech 10^TM list in October
2009. With one replacement because of the buyout of Canadian
Hydro Developers, here is their list, along with a few of my observations
about each company.  The first ticker is the Canadian ticker (in Canadian
dollars,) and the second ticker is the US ticker, denominated in US$.

1. Westport Innovations
(WPT.TO, WPRT)

Vancouver-based Westport trades on the
NASDAQ as well as the Toronto Stock Exchange.  This means the company may
be less interesting to investors looking for less-noticed stocks.  The
company’s alternative engines and drive trains will probably do well if oil
prices continue to rise.  Although the company can fund about two year’s
worth of operating cash losses from the balance sheet, I prefer profitable
companies which are actively paying down their debt.

2. RuggedCom
(RCM.TO, RUGGF.PK)

I took a close look
at Smart Grid company Ruggedcom in November, and I concluded that, although
I liked the business and had a generally good feeling about management, I felt
it was overvalued at US$16.60.  Since it’s currently trading around $20,
I’m in no hurry to buy.

3. WaterFurnace Renewable Energy
(WFI.TO, WFIFF.PK)

Waterfunace is a long-time
favorite of mine, having appeared in both my own top stock lists in 2009
and 2010. 
In fact, I first learned about the Cleantech 10 list because it showed up in a
news story about Waterfunace.  

The Fort Wayne-based company manufactures a broad range of geothermal heat
pumps, a clean energy technology that not only saves energy compared to other
forms of heating and cooling a building, but also shifts
electricity use to seasons during which wind based power is plentiful.

The company also provided me with some extra confirmation that US based
investors tend to ignore Toronto listed companies: A contributing writer for the
Motley Fool called me to ask about the company in January, after a relative had recommended
one of their heat pumps for his home.  He was researching it for his own
portfolio, and when I asked him if he was likely to write about it, he said that
he probably wouldn’t.  The Motley Fool pays him to write articles that are likely
to be popular, and, he said, that companies without US tickers don’t interest
many of their readers.

4. Magma Energy Corp.
(MXY.TO, MGMXF.PK)

Vancouver based Magma
Energy Corp went
public in July last year, with the intention of buying up interests in
geothermal electricity projects.  Geothermal is one of my favorite
renewable energy sectors, since the electricity it produces is competitive with
wind, but the power is much more reliable, but I have not yet taken the time to
analyze Magma and decide if it’s a good value.

5. 5N Plus
(VNP.TO, FPLSF.PK)

Montreal based 5N Plus
provides purified metals, and is probably most interesting to investors because
it supplies pure metals used in the Solar photovoltaic panels.

6. Carmanah Technologies Corp.
(CMH.TO, CMHXF.PK)

Victoria based Carmanah
manufactures LED lighting with integrated solar panels and batteries which allow
for use in remote locations without a grid connection.  Not having to lay
wires for a grid connection means that Carmanah’s products are often the most
cost effective lighting solution, despite the high cost of both the batteries
and solar.  I owned the stock from late 2005 until I sold
it in September 2008 in response to the financial crisis, because I did not
think that the company had the financial muscle to weather the
storm.  

The company last traded at $0.80, still below the $0.95 at which I sold
despite almost doubling since March 2009, but I have not looked at the company
again to see if they have done what I consider to be sufficient work repairing
their balance sheet and cash flows.

7. NEO Material
Technologies (NEM.TO, NEMFF.PK)

Toronto based NEO Material Technologies
is one of the companies that made this whole exercise of going through the list
worth doing.  I was not previously aware of this manufacturer of rare-earth
and Zirconium based batteries, which are used in high-performance electric
motors (Recall John
Petersen’s recent Storm Warning about the availability of rare earths for hybrid
and electric vehicles.) Despite worries about rare earth supply, if NEO
Materials is able to pass higher supply costs on to its customers, the company
could be very profitable.  Will it?  Finding out is where the work
comes in.

8. Stantec
(STN.TO, STN)

Also new to me is Edmonton based Stantec,
a design firm geared towards sustainability.  Stantec is worth further
research because energy efficiency is more often about design than about
products.  In other words, design firms can often do more to reduce energy
use than can be accomplished by simply slotting more efficient products into the
same systems.  

9. Hemisphere GPS
(HEM.TO, HEMGF.PK)

Calgary based Hemisphere GPS
manufactures GPS equipment for farming equipment which allows farmers to better
gauge the amount of fertilizer or pesticide applied to a specific part of the
field to the needs of the crop there.  This more efficient use of resources
not only improves the economics for the farmer, but is less wasteful and
polluting to the environment.

10. Innergex Renewable Energy Inc.
(INE.TO, INGXF.PK)

Innergex
is a developer and operator of hydroelectric and wind projects, with the
majority being hydroelectric.  This makes the company an interesting play
because the economics
of upgrading old hydroelectric plants are far better than even building new coal
plants, while new hydropower projects have economics that are comparable with
the best other renewables, wind and geothermal.  Like most of these, I
have not looked at Innergex’s valuation, but I consider it worth a look.

The Cleantech 10 List from Corporate Knights on Vimeo.

Next Steps

NEO Materials, Stantec, Magma, and Innergex all are interesting enough to me
that I may do further research.  With interesting prospects like these, my
next step is to start monitoring the news for these companies, and perhaps do a
preliminary valuation based on simple metrics such as P/E, cash on hand, current
ratio, and cash flow from operations.  If the stock price falls to a point
where the valuation looks good, and the news does not account for the change, it
will be time to do the real work of reading through annual and quarterly
reports.

DISCLOSURE: The author and/or
his clients own WFI. 

DISCLAIMER: The information and trades
provided here 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.

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