5 Green Stocks for a Bad Economy

Green investments mostly turned an unfortunate shade of red in 2008, and this year hardly looks better. Dried-up lending and slumping demand continue to hit the fledgling industry hard as investors flee from companies offering some of the most meaningful glimpses into a more sustainable future. Even after some devastating share-price drops, many are still struggling. With credit concerns at the fore, energy costs falling, and a broad aversion among investors to companies lacking in cash or a proven track record, it could be a lengthy road back. Right now, the industry is in a bit of a holding pattern, waiting to see how new tax and stimulus plans will play out against a backdrop of weaker customer demand. Here's a quick look at the current crop of well-positioned survivors, and a few smaller names still forging ahead.

Wind
To be blunt, there is a case against investing in the wind sector right now: credit markets. Building wind farms is a costly proposition, and if access to capital is tight there's very little reason to get excited about returning to the sector. "The financing market has really played havoc in the wind industry. There are good companies...but there are a lot of unknowns still," says Shez Bandukwala, a partner at ThinkEquity. 

Vestas (VWDRY). Ahead of its February 11 earnings report, Vestas said the slowdown means demand has fallen off sharply. Citigroup recently predicted Vestas' sales would grow just 5 percent in 2009 before rebounding in 2010. But Vestas could be in for an Obama bump if the president's stimulus package includes a better mix of tax credits for wind. In anticipation, Jefferies recently backed its "buy" ratings on both Vestas and rival Gamesa on a hoped-for inclusion of new credit schemes and possibly new funding that could get some investors in wind projects off the fence.

Solar
The first half of the year could still include nasty surprises for solar, including an industrywide shakeout, as an oversupply of products meets declining demand. Traditional solar-panel makers are facing pricing pressure after a big run-up in production. But solar did win a victory with last year's extension of the investment tax credit (ITC), which could be worth $400 billion over the next eight years by some estimates. The ITC now covers 30 percent of a project's cost compared to a former $2,000 cap. The hope is the ITC will eventually spur demand as homeowners and businesses get serious about spending on solar technology (when that will be, of course, is another open question, as is the fate of a host of still-murky tax issues winding through Congress.

First Solar (FSLR). Of all the names in the solar space, First Solar may be the one almost everyone expects will survive this downturn. The company boasts a technological edge (it makes the industry's lowest-cost thin-film panel) and has one of the industry's better balance sheets. Also, down the road, First Solar's healthy cash flow will help keep it in the "acquirer" category in what analysts expect will be a substantial round of industry consolidation (though it won't start until financing recovers). First Solar has a "phenominal position," Bankduwala says. In the September quarter, cash flow from operations hit $140 million, up from a total of $205.5 million in all of 2007. S&P says First Solar is a "buy" with a $195 price target, and that even as the industry gets weaker, the firm's order book "seems more secure to us than most peers."

Smart Meters
Advanced metering infrastructure (AMI) is still among the best-positioned industries to benefit from any economic stimulus plan, and might just include the best performing names in the "green" sector this year. Capital spending plans are being reeled in throughout the utility sector, but upgrading the way we read meters and track energy consumption will be a long-term theme for both the industry and investors.

ESCO Technologies (ESE). The St. Louis-based company makes all sorts of gear that allows modern meters to communicate with utilities, in addition to other business lines including filtration. Grid upgrades are the key growth area for this company and competitors like Itron. In 2009, analysts say there's a good chance ESCO could enjoy some combination of a modest stimulus boost, revenue from contracts with utilities in New York and Toronto, and possibly new contracts with several major utilities. Keep an eye on SoCal Gas, for example. Deutsche Bank says ESCO has a 40 percent shot at winning that contract, or another with a large customer in Latin America. Deutsche Bank says ESCO has the best chance of outperforming the sector in 2009 and values the firm at $42 a share.