How to Build Your Sustainable Portfolio

A version of this article originally ran in Progressive Investor, our monthly sustainable investing newsletter. It provides on-going analysis of clean tech investment opportunities: renewable energy, fuel cells, organics, forests and emerging areas on the private and public sides.

by Rona Fried

This holiday season as you are evaluating your financial position, you may be considering converting your investment portfolio to sustainable companies. Over the years that we have  published Progressive Investor, our analyst partners have recommended many stocks, most of which have done very well for subscribers.

Some of the many stocks we've discussed are:

United Natural (UNFI): largest US natural products distributor
Whole Foods (WFMI): largest natural products supermarket chain 
Strategic Diagnostics (SDIX): test kits for GMOs & safety
Canadian Pacific Railway (TSE:CP)
Air Products & Chemicals (APD): makers of hydrogen
Deere & Co. (DE) : equipment manufacturer
Hydrogenics (TO:HYG): fuel cells
Intermagnetics General (IMGC): grid reliability
Itron (ITRI): grid efficiency
Kyocera (KYO):  solar
Philips Electronics (PHG): electronics
Plug Power (PLUG): fuel cells 
Quantum (QTWW): hydrogen tanks for vehicles
Baldor (BEZ): efficient motors
Power Integrations (POWI): efficiency 
STMicroelectronics (STM): electronics
Cuno (CUNO) : water filtration
Trojan Technologies (TO: TUV): water filtration
Zenon (TO: ZEN): water filtration
Harris Interactive (HPOL): polling company
Johnson & Johnson (JNJ): medical devices
Sonosite (SONO): hand held ultrasound

Tips for Converting Your Portfolio

1.  Create your universe of stocks 
Make a list of companies you would feel excited about investing in. As a Progressive Investor subscriber, you'll learn about many potential stocks. You can also learn about them by reading our daily news on the homepage or in other financial outlets.  

For this first pass it doesn't matter if a company is large or small or from a particular industry type.

2. Understand a company's business
It's important to understand what a company's business is about. If you shop in Whole Foods Market's (WFMI) stores you will understand their business model - they sell natural food to American and Canadian people, and now English people. If you like the concept and believe the market for natural foods will continue to grow, put it on your list.

Sometimes a company is in several businesses or has numerous product lines. Often it's hard to understand what the company does or you might understand part of one of the things it does. If you don't understand a company's products or services well enough to be able to explain it to someone, you can't really analyze the company, so don't invest in them.

3. Research the companies you like the best
Within your list of say, 100 stocks you'd be happy to own, there is a subset that you get really excited about. You understand what these companies do - what their business is about. This is the group of stocks to research further.

It is one thing to like a company; it is another to know that it is a good investment. You can like a company and buy its products to support that company's growth - if you are going to invest in a company you want to know your investment will grow.

Is this too obvious? So many people like wind companies, for example, because they want to participate in the growth of sustainable energy. You can buy wind energy to power your home or business and benefit that way. But to invest your money in a wind company stock is a very different story.

You need to have some basic knowledge about investing. Learn the basics of company analysis: its size, PE ratio (price per earnings now and projected PE ratio), EPS earnings per share, how it has performed and the like. You can learn this in any basic investors book or website.

Read the news about the company (eg., at Yahoo, CBS Marketwatch); learn what they have been doing and what their plans are. The more familiar you are with a company the more you can make sense of its stock movements. Also look at how the company fares compared with its peers.

4. Decide whether now is the time to Buy. 
After learning about a particular company, you decide you do want to invest in them. Is now the right time?

A company may be great, but the price may be too high because other people like it too and it is way overbought. We see that a lot with the fuel cell companies. They go through wild phases, going way up and way down.

One of our subscribers, Gilles Arbour explains, "I like Quantum (QTWW), but I don't like it at all price levels. I have bought it and sold it several times. When it goes sky high I sell, when it goes way down, I buy. I always keep a core amount of about 1000 shares, but I trade the rest."

When you watch a company for awhile you can get a sense for its price movements. Buy when the stock dips. 

5. Start with "paper trading." 
Beginning investors should start by investing safely - on paper-only. Set up a portfolio on a website like CBS Marketwatch and pretend you are buying 1,000 shares of one company and 200 shares of another. Buy and sell stocks over a six- month period and see how much money you make or lose. That's how you learn without hurting yourself.

6. Never fall in love with a stock.
It's hard to do! Watch the news. If a company's story changes and the reason you invested in the first place disappears then sell the stock.

7. Diversify your portfolio. 
Where you invest your money also depends on how much money you have to invest. Many advisors say if you have less than $100,000, most, if not all, of your money should be in mutual funds. If you have 3 mutual funds you own 100 or more companies. Although Gilles has much of his money in individual stocks, his long-term money is in mutual funds.

If you have enough money and enjoy stock investing, you can create your own diversified mutual fund by investing in many stocks. Gilles owns 40-50 stocks at any given time and he feels good about every single company. "I've never found a mutual fund where I can say that," he says.

The important point is that if you only have enough money to invest in 3 stocks, that's way too risky and you should be in mutual funds. If you have most of your money in mutual funds, you might decide to allocate a portion of it to individual stocks.

To track 15-25 companies is plenty for most people. If you have most of your money in mutual funds and a minor percentage in 20 different stocks, that's diversification - especially if you spread it between different industries - not all in energy.

Natural food industry stocks have outperformed the market for years because of positive demographic trends, but food stocks in general are considered "defensive" stocks, providing protection when the economy sours. Energy stocks tend to run in the opposite direction - they run up quickly in an accelerating economy, but tank in a difficult economy.

Putting Theory in Action
If you are converting an existing portfolio, sell the stocks you like the least first, and gradually buy new stocks as they come into buying position. First purchase companies that have a high market cap (large companies) because the share price won't fluctuate as much as a smaller company's stock will. Current economic conditions aren't strong enough to feel safe with companies that don't have very strong fundamentals.

Even though Whole Foods Market has only a $5.8 billion market cap compared to a company like IBM ($157 billion), and United Natural (UNFI) has just over a billion, these are considered large companies. A very small company like Strategic Diagnostics ($63 million market cap) has the most potential to grow but is also the riskiest kind of investment.

You might invest $30,000 in a larger company like United Natural, but only $2000 in a small energy company like Hydrogenics. And you might purchase several stocks in each industry sector - alternative energy and natural food, for example - to spread out your risk and profit potential.

A good time to buy a stock is when the overall market goes down. The company that you like goes down along with the whole market, having nothing to do with company performance.

Once you buy a stock you don't need to monitor it every day. Scan your portfolio on a website like CBS Marketwatch and if there is a big, crazy change - like a stock suddenly shoots way up or down, especially if it moves much more than the market - evaluate the news. Sometimes a stock price drops because of some obviously temporary bad news, making it a good time to buy more.

"I'm not a trader," says Arbour, "but I don't only buy and hold either. The tech bubble taught us that lesson. So many people that bought and held are still holding but they're not holding much. If I've done well with a stock but now I can't see how it will continue to climb, I sell it." If he believes it will continue to rise, he might sell half of it to lock in the profit.

"Whole Foods (WFMI)," he says, "is an example of a stock I may hold for 10 years and maybe leave to my grandchildren one day. I continue to like their story and I see the stock increasing in value. There is no reason to sell it. Their profits keep rising and they are spending more on existing stores. I see no reason for them to do anything but continue to expand."

He points out that their competitor, Wild Oats (OATS), doesn't have as strong a story or as strong fundamentals. The same is true for Hain Celestial (HAIN), another health food stock. He bought it for a while and sold it at a good profit, but doesn't like their story enough to keep it long term. They aren't involved with organic as much and he doesn't like some of their product lines. People go in and out of the stock rather than holding onto it.

Lastly, you can't only invest in "perfectly sustainable" companies because you need some very large companies in your portfolio to be diversified. Kyocera (KYO), for example, is a solar leader, but the company has a multitude of other product lines.

Best of luck!

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Rona Fried, Ph.D., is President & CEO of SustainableBusiness.com, the online community for green business: daily sustainable business & investor news, Green Dream Jobs, and Business Connections. SustainableBusiness.com also publishes Progressive Investor, which provides ongoing analysis of clean tech investment opportunities.