Air-pollution control stocks, though still as torpid as the air on a muggy day, may finally be ready to stir.
New smog and soot regulations are in the offing from Washington; European and Asian countries are beginning to regulate air quality; and consumers all over are snapping up air cleaners for their homes and offices. The Institute of Clean Air Companies predicts that its industry’s sales, which have been flat at best for seven years, will soon be growing 7 percent a year.
“The news may still be bad, but the promise is certainly good,” said Jeffrey C. Smith, the institute’s executive director.
Many investors, however, were badly burned when these stocks, which soared on the promise of the 1990 Clean Air Act, plunged as the expected business-bolstering regulations never arrived. The companies are small, too, often with sales of just tens of millions of dollars. Finally, even those money managers who think the industry will recover do not sound at all certain.
“The equation still has an awful lot of variables,” said Philip M. Huyck, a managing director at Credit Suisse First Boston. Added Ralph V. Whitworth, a managing member of Relational Investors LLC, a $40 million investment fund, “This industry will again have a backlog of business, but I’m not sure if this is the time yet.”
So, how can investors dabble in these stocks without taking a huge gamble?
One way is to build their own mutual funds by picking a fast-moving segment of the industry and buying stocks in several of its most promising companies. This depressed industry’s low stock prices may make such a strategy easier to finance.
Steven A. Kohl, a money manager at the Matador Capital Management Corp., thinks individuals might do well investing in a basket of indoor-pollution companies.
“The lung associations are publicizing the hazards of bad air in homes and offices, and people are getting concerned,” Kohl said. “I think we’ll soon see tough standards and regulations about indoor air, and the indoor companies could easily double their growth rate.”
Kohl has an A-list of several indoor-pollution companies, including Trion Inc., the Farr Co. and Clarcor Inc. Trion, which had sales of $62.4 million in 1996, is sitting on a backlog of orders and has had two strong quarters, he said. Farr, which makes heating, ventilating and air-conditioning filters, had $122 million in sales in 1996. Clarcor makes filters for the residential, commercial and industrial markets and is one of the larger companies in the segment, with $333.4 million in revenue in 1996.
Companies in industry segments that have held their own over the last few years are a less risky bet, too. BHA Group Holdings, for example, specializes in replacement parts for pollution control equipment and thus is not solely dependent on new orders. It has enjoyed double-digit growth in revenue and earnings over the last four years, and its stock appreciated a respectable 10 percent in 1997.
Buying stocks in these companies still means betting squarely on the environmental industry, however. For skittish investors, there are other, more indirect ways to play this market.
One is to pick companies whose futures will be helped by, but are not entirely linked to, a surge in sales of air-pollution control equipment. For example, air cleaning is one of the Engelhard Corp.’s growing segments, but it accounts for only 20 percent of sales. While shares of Engelhard, which makes chemicals, fell about 10 percent last year, they have doubled since 1990–a far better record than that of most air-pollution control stocks.
Similarly, a portion of U.S. Filter’s business is in air-pollution control. But its stock has also done well over the last several years because its products are sold primarily for filtering water, a segment of the environmental industry that has held steadier of late.
Another strategy: selecting companies whose products do more than just clean out gunk. That is why Dr. Robert R. Urquhart, a retired cardiologist who once swore he would “never buy another goody-two-shoes environmental stock,” recently bought shares of Turbodyne Technologies. He was impressed with the way the company’s electric turbine saved gas and eliminated soot on his family’s fishing boats.
“I won’t invest in another environmental stock per se, but this product stands on its own as a fuel saver,” he said.
Joan B. Berkowitz, a managing director of the consulting firm Farkas Berkowitz & Co., is high on ITEQ, a fast-growing enterprise that makes air-cleaning systems, for the same reason. A fast-growing company, ITEQ’s systems not only clean air but utilize it in industrial processes.
Still, some investors may have the stomach to buy some of these small, cheap, out-of-favor stocks that are pure plays on air-pollution control. One advantage for these risk-takers is that many of the companies are too small for the big boys–institutional investors–to notice.
“I’m interested because I suspect nobody else is,” said Anthony W. Roberts, a private investor in New York who recently bought shares of Environmental Elements, which sells dust-removal equipment.
Environmental Elements has not had a profitable year since 1992. Its shares, which peaked at $22 in July 1991, hover around $2.50 now. But, says its chairman, Edward H. Verdery, “we are at the absolute knife edge of being profitable.”
Roberts is not the only investor who believes him. “The company survived a horrible decade, it brought its break-even rate way down, and it can be a wonderful investment,” said Charles E. Haldeman, a Philadelphia investor who also has been buying shares.
The pure-play companies are working hard to get more converts.
Turbodyne, for one, just hired an investor relations firm to publicize it. “Without sophisticated analysts, small-cap investors feel they are shooting in the dark,” said Edward M. Halimi, Turbodyne’s chief executive. And Wahlco Environmental Systems, a maker of flue gas conditioning devices whose stock sells for just 50 cents, has issued new shares that minority shareholders can buy at a deep discount. Then, Wahlco will combine all outstanding shares so that they are worth at least $1.80 each.
A $2 stock is not a big eye-catcher either, of course. But apparently, investors are starting to look at them.
The stock of Thermatrix Inc., which makes nitrogen oxide removal equipment, closed Wednesday at $1.3125–not quite a tenth of its offering price in June 1996. John T. Schofield, its president, acknowledges it is not likely to break even for at least another year. But trading in the stock is already up tenfold, to 40,000 trades a day from an average of 4,000 a few months ago.
“At the current price, they’re probably a good investment,” said R. Steven Maxwell, managing director of Technology Strategic Group, an environmental consulting firm.
Maybe so. But for those who saw their hopes dashed the last time these stocks looked good, there are always the less risky strategies.
