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Invest in necessities: Air, trash and H20

April 06, 2009 12:38 IST

The Investor Team tried to figure out ways to make a virtue of necessity, specifically when it comes to trends that relate to the world's growing population size, appetite, air pollution, water consumption and trash production.

The conversation started with fertilizer firms, with some of the biggest names in that field being Potash Corporation of Saskatchewan, Agrium and Mosaic. All of these firms share similar performance profiles, benefiting in the short and long term, but suffering in the medium run.

Year-to-date, Potash is up 23.7%, Agrium 12.3% and Mosaic 37%. Over the past year, they've all fallen pretty hard, though, as the commodities bubble burst, with Potash down 43.2%, Agrium 40.4% and Mosaic down 54.7%. Over five years, again, they're all hugely profitable for shareholders, with Potash up 587.6%, Agrium up 172.8% and Mosaic up 261.4%.

Stephen Roseman, head of Thesis Capital, a New York-based hedge fund, notes that these stocks play into the much larger story of the emerging global middle class. Part of that step up includes moving up from two meals a day to three.

Related is the issue of clean available water, one that had already been addressed in some detail in a prior Investor Team discussion and by billionaire wildcatter T. Boone Pickens.

Roseman expanded the conversation to include clean air and clean energy. General Electric, for example, is dedicated to making its factories relatively green, although it's hard to call this a clean-air play.

One possible way to get involved in this area, Roseman says, is through French firm Alstom, which deals with energy infrastructure and construction, making turbines, boilers and distribution networks. He also points to McDermott International, an American firm involved in making components for nuclear power, steam generation and clean coal. The stock's been volatile; at $14.32, it's trading up from its 52-week low of $5.98, though it's also well off its 52-week high of $67.14.

Garbage remains an eternal problem, with at least a few avenues for investment. One is the Market Vectors Environmental Services Index exchange-traded fund, which replicates an index that tracks publicly traded waste removal and management firms. The ETF is small, with a $23.3 million market capitalization, and relatively new -- it started in October 2006. Since it began, however, it's outperformed the larger market, though it's still down 28.9%.

Garbage remains a tricky place to invest, Roseman says, because it can be extremely localized and has a host of technology-related issues, including ways to capture and make use of the methane gas that seeps from the trash. So far, he says, there simply is no clear winner in the methane gas-trapping market. And though garbage remains a local industry, as noted, the major players by and large rolled up in the 1990s, so most of the obvious buyouts have already taken place.

John Jacquemin, founder of Mooring Financial, notes that his local landfills have seen reduced use since the financial meltdown took place. So there's one positive benefit of the bad financial times: less trash--at least in our landfills, if not on our books.

Garbage in, garbage out?

Forbes: Fertilizer firms -- are these evergreens? There's Potash, Agrium, Mosaic, among others. What do you make of the idea of people getting involved with fertilizer firms as a way of trying to get into the basic human needs to grow food and to eat?

Michael Ervolini: Often times, stocks turn into fertilizer, in a way.

Stephen Roseman: Well said, Michael. No, I mean, there's no doubt you are on to something there. There is a macro game that's playing out right now in the investing world, and it has actually been playing out quite profitably over the last few years. And like most assets over the last 12 months, it has not worked as well.

But, it is, no doubt, something worth considering as an investor, which is exposure to that basic fundamental human need -- you have an emerging middle class in the developing world. The emerging middle class goes from eating typically two meals a day to three meals a day, and it's something on that order.

And of course we all know about population dynamics. I mean China and India, and then countries that are lesser in population but are still equally consumptive in terms of their absolute growth and need for food. It is a place worth considering, and it's interesting, because there's a whole value chain there. And you asked specifically about fertilizer stocks, but if you think about agriculture and the agriculture food chain -- pardon the pun -- there are opportunities in the investment food chain throughout agriculture.

And it's not just agriculture, by the way. When you talk about basic human need, there's also water, which is emerging as a very serious topic for most governments. And there's going to be a lot of money spent in the development of water projects, and there are companies which support that.

Forbes: Clean water is one of the world's greatest health issues, too.

Roseman: Exactly. And that is something that is slowly, just now, starting to be addressed. I mean, everything else we've addressed over the years -- from malaria to measles and mumps -- is water. The lack of clean water has been staring us in the face now, and truly has been exacerbated by the industrialization of some of these countries.

But this is a problem that's been around for a long time... But yet, just now, the governments of all the world's nations are just now starting to address it. But even in the U.S. and Canada, we're seeing significant droughts leading to significant water shortages. People have paid a lot of attention to behavioral changes around personal finance, consumption and the lack of a savings rate in the United States, but we haven't even begun to address the lack of water in some parts of this country.

And, you know, water is not something that you're just able to go out and tap new resources. And the scientists already know where the identified bodies of water are. And to access this is costly and time-consuming and not as easily done. T. Boone Pickens picked up on this years ago, when Boone focused his attention -- or switched his attention -- from focusing on mineral rights in land to water rights in land. You know, Boone is the largest private water owner in this country.

Forbes: I know there are water exchange-traded funds and things like that. Is this something where water will just get more expensive and more expensive until we pretty much use it up?

Roseman: It's like any object that suffers from scarcity, or any commodity that suffers from scarcity. The price of the water is ultimately going to be dictated by market demand for the water. You know, that presupposes no government-involvement socialization, which is not a good thing to presuppose. Because the likelihood is there's not a government on the planet that's going to allow its citizens to go without accessible, affordable water, whether it means creating desalinization plants at the coast and pumping water into the heart of the countries. And in some cases, you have some political issues. Coast to coast, it's ultimately governed by federal water laws.

When you get into certain other regions of the world, for example, in Africa, you have political issues because you have actual political boundaries within the continent. And it's the same with Europe, for example. (This) really plays to the heart of investing in industries that are going to benefit from basic human needs, and you're seeing this globally. You know, you go into developing countries, like India and China, they have larger absolute needs for technology to produce cleaner energy, so that the air in the city centers is actually breathable.

Forbes: How do you take advantage of clean air? I mean, how are they going to even get clean air in places like China and India? What are they doing?

Roseman: Well, as long as they are burning high-sulfur coal, they need air cleaning technologies in the power plants. So now this goes from, again, agriculture into energy. There are a lot of trends that are very macro in nature, that are going to provide a very stiff tail wind for investment outcomes.

Forbes: Where would I look if I was interested in taking advantage of the cleaner-air mega-trend?

Roseman: Sure. So there are Web sites that actually focus on this. There are actually energy-industry Web sites and clean-technology Web sites. And it is a topic in digital form of the business press every day, and in the printed form -- or what's left of it, of the business press -- every day. So as a individual investor, I would start by just doing your work and being current on global affairs.

Forbes: What do you make of garbage as an evergreen investment, kind of like a utility? Waste Management is the largest firm here, but there are smaller players too.

Roseman: The big investment opportunities in the traditional trash business have largely played out. And that was the consolidation of the trash industry. Again, as landfills become increasingly filled and not able to handle more capacity, there are companies that are trying to address how you go about modifying existing landfills, or adding capacity on future land fills. So, making landfills more productive. And one of the big problems with landfills is they produce a lot of methane gas. So, one, you have to figure out how to deal with the methane gas in a safe way. You know, of course, you have the NIMBY issue. That doesn't go away. There's no technology that really solves the NIMBY issue.

And the companies are trying to develop technologies to increase efficacy in the existing infrastructure. So, as before, it was trash investing 101, where they were rolling up an industry looking for cost savings on the back end, and getting operating leverage by consolidating operations in the early through mid 1990s, now we're kind of on to the next level, which is identifying the technology. Before you can even identify the companies, you have to identify the technologies that are going to be successful in addressing this. And that's not as easy to do, because there are there are issues with application of the technologies, and there's buy-in from the communities.

Trash is very much a local industry. And different governments and different political organizations are going to have their feelings and impressions and bugaboos about what technologies they should or shouldn't be employing in their communities. And as a consequence, it's very, very difficult to sit here today and identify the trends in trash that might be most successful. 'Cause you have to understand what technology's going to win.

John Jacquemin: One interesting sideline is that there was an article last week about landfills, including those in Loudon County, Va., right where I live, that the volumes with the slowing economy and slowing consumption have dropped about 25%. Which is more than, intuitively, I would have guessed. But there are fewer boxes from fewer purchases. And just lower consumption in general has now extended the life of this local landfill and probably many more. They thought it would be full in about a year and a half, and now it looks like it's probably going to be usable for an additional year and a half.

Forbes: Amazing, a bear market for garbage. Never thought that would happen. Aren't there companies that are trying to harvest the methane gas from dumps?

Roseman: There are indeed. I mean, there's a lot of this (that) gets back to the heart of my point, which is there are developing business models in terms of how people are going to capitalize on this. It's everything from whether it's harvesting methane gas from dumps, a better processing methane gas, whether it's converting vegetable oils into fuel for cars. And it really is a massive, massive land grab right now, both in terms of depth and breadth. Because, again, it's very difficult to handicap what the outcome of this is gonna be.

David Serchuk, Forbes