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Eco Buyers Beware
Bamboo is often considered an environmentally friendly plant. It has many uses from wood flooring, to food utensils, to clothing. Those with an environmental bent have been using products made from this plant for years. The U.S. Federal Trade Commission recently warned, however, that “bamboo” clothing purchased from a collection of major retailers might not be as environmentally friendly as purchasers think since they were technically made of rayon. The issue of environmental hype versus environmental fact, however, goes well beyond “bamboo” clothing.
It seems that the bamboo/rayon issue isn’t about the use of bamboo in the production of the clothing. In fact, bamboo very well might have been used. The issue is that rayon is a very specific product that is made from cellulose found in plants and trees, such as bamboo. The process is chemically driven and, according to the Federal Trade Commission, the resulting fiber is rayon and must be labeled as such.
A large number of retailers were warned about the practice of labeling clothing as made from bamboo when, in fact, the clothing was made of rayon. The list includes retail heavy weights Wal-Mart (WMT), J.C. Penney (JCP), Costco (COST), Bed Bath & Beyond (BBBY), and Internet footwear darling Zappos.com.
Although the issue might seem like splitting hairs, for those truly concerned about the environment, spending money on a rayon shirt that may or may not contain bamboo cellulose might be a big deal. This is likely to be an increasingly important issue for both regulators and consumers as more and more companies try to attach themselves to the environmentally friendly bandwagon. But the concern shouldn’t stop there, as investors need to parse hype from reality when looking at stocks, too.
For example, environmentally friendly power alternatives have recently come into vogue, with solar, wind, and nuclear power all enjoying something of a renaissance in demand. In recent years, this has led to heady advances in the shares of suppliers of solar power cells, such as First Solar (FSLR), GT Solar (SOLR), and Evergreen Solar (ESLR). Unfortunately, despite the potential and the social and political support for solar power, it is still a relatively inefficient power source that looks most compelling when other power sources, such as oil, are at elevated prices. When those other sources drop in price, solar power’s allure also tends to fall. This is one of the many explanations behind the precipitous drop in the solar power cell makers’ shares.
Evergreen Solar is a poster child for the excess and subsequent crash. The initial public offering (IPO) of the company’s shares took place in late 2000. After losing almost all of its post-IPO value (the share price fell below $1.00 in late 2002), the stock began to climb as interest in solar power increased. During this period, the company was able to raise more equity capital, increasing shares outstanding from 11 million at the end of 2002 to 165 million by late 2008. About $375 million in debt was also raised. Meanwhile, Evergreen had posted a deficit every year since going public in 2000, topped by a roughly $85 million loss in 2008. Evergreen’s shareholders lost virtually all of their investment, as the stock plummeted to $1.00 by early 2009. This is truly a buyer beware story. [For more examples, see: The Emerging Market For Electric-Car Batteries.]
It is also highly possible that both consumers and investors need to be cognizant of the current hype surrounding hybrid and electric vehicles. On the consumer front, the current collection of environmentally friendly cars, which are now available from virtually all of the major manufactures, including Toyota (TM), Honda (HMC) and Ford (F), not only cost more because of the technology inside, but many companies are filling them with high-end upgrades, further boosting the cost. In fact, in some instances, the vehicles can’t be purchased without the upgrades, eroding the dollar value of the efficiency gains these vehicles enjoy over those that burn gasoline. The manufactures are, in effect, treating hybrid cars as luxury items, despite the fact that demand isn’t necessarily limited to the high-end market.
On the investment front, the prices of battery makers could be in a bubble similar to that of the solar makers. Shares of A123 Systems (AONE) are an example. The shares came to market priced at $17 in September 2009, raising almost $400 million, with another $100 million raised in preferred stock. The shares advanced above $20 on the first day of trading and remain near that level despite less-than-stellar earnings (for the first nine months of 2009, the company recorded a deficit of $6.06 per share). Ener1 (HEV) is another battery maker that could cause investors some sleepless nights. And, more recently, electric car manufacturer Tesla has filed to go public.
Human history is filled with fads that didn’t last. While there are solid reasons to be interested in environmentally conscious purchases and environmentally oriented investments, consumers and investors need to carefully examine both the claims being made and the product potential being touted before making a purchase decision.