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The Best Ways To Profit From Greater Energy Efficiency

David Sterman

Forget the old adage "A penny saved is a penny earned."

When it comes to investments in energy efficiency, the payback can be 200% or even 400%, according to various studies. That's why there is a fresh push to step up our pace of energy efficiency investments, as I discussed in Part One of this two-part series.

The challenge for investors is to find companies that are squarely focused on the issue. In my first column, I noted that Johnson Controls (JCI), Honeywell (HON) and Ingersoll-Rand (NYSE: IR) all offer a variety of efficiency-oriented products and services.

However, these companies aren't really pure plays, as they have considerable exposure to the auto industry, the defense sector and other niches that can dilute the gains they will see from rising spending on their energy efficiency gear.

Let's take a look at smaller companies that are almost exclusively dedicated to this opportunity.

1. Ameresco (AMRC)
Think of this company as a lead contractor. Its team of engineers and analysts who help companies identify possible investments that can help reduce their energy consumption. A key focus is in the areas of heating, cooling and lighting that can help clients attain an EnergyStar designation or LEED (Leadership in Energy and Environmental Design) certification. Ameresco also helps companies install renewable-energy systems at their facilities.

Back in the past decade, when the economy was on firmer ground, many companies decided to make these money-saving investments, helping Ameresco's revenue base grow from under $300 million in 2006 to more than $600 million by 2010. But the slow-growth economy since then has led to much longer sales cycles as the company tries to convert its pipeline of sales leads into firm orders.

Equally significant, the U.S. government, a key customer, has frozen new orders in recent quarters. As a result, sales are expected to be flat this year at around $628 million. That explains why shares have lost almost half of their value over the past two years.

Yet analysts expect double-digit sales growth to return in 2014, and current profit forecasts will likely prove conservative if the ESIC Act I discussed in Part One becomes law. In support of that brightening outlook, CEO George Sakellaris recently bought nearly $200,000 worth of company stock at around $7.70 a share.

2. Cree (CREE)
LED lightbulbs are so appealing -- in both terms energy consumption and years of uninterrupted operation -- that their eventual long-term dominance of the lighting industry appears to be an almost foregone conclusion. As I noted in a look at Cree in early 2012, "One industry study, conducted by analysts at Needham, predicts demand for LED lights will grow 90% a year for the next five years. But industry sales will only rise 38% annually as price cuts take a bite out of revenue."

That view still holds, but investors now need to tread carefully with Cree. As I noted in a more recent follow-up piece, investors may be in for a rude surprise when it comes to gross profit margins in the quarters ahead, as industry pricing may be falling too fast. I love this company -- and would really love the stock on a good-size pullback

3. Revolution Lighting (RVLT)
This Connecticut-based LED lighting maker lacks Cree's robust technology platform (fueled by heavy R&D spending), but it also sports a market value that is just 5% of the size of Cree. The intriguing angle here is the September 2012 hiring of Robert LaPenta, who a decade ago helped build defense contractor L-3 Communications (LLL) into what has become a $7.7 billion company.

LaPenta has moved quickly to eliminate the company's debt and enhance the product lineup and sales reach. It's a bit too soon to know whether he can turn Revolution into a profitable and growing company, but he's making the rights moves thus far.

4. EnerNOC (ENOC)
Our nation's aging electricity generation infrastructure is also a source of energy inefficiency. Not only do long-distance power lines lose power in the transmission process, but allocating all of that power to the right parts of the national energy grid can be very inefficient.That's where this company comes in.

EnerNOC uses its Network Operating Center (NOC) to provide energy management and energy-efficiency solutions to assist grid operators and utilities. For example, many utilities must invest in excess capacity to handle unusual demand spikes that may only happen a few times a year. By sharing the load with other utilities and working with large customers to agree to curtail usage at peak times, the utility can save a great deal of money by cutting the need for additional power plants.

EnerNOC says an investment of $1 million in its technology can save anywhere between $60 million and $100 million in construction costs. If a utility sees a demand spike coming, it can shed non-critical loads, deploy backup power and optimize the existing flow of current -- a far better solution than adding capacity "just in case."

For a number of years, the company had great success signing up power plant operators. Sales grew at least 45% every year from 2006 through 2010, but growth suddenly flattened in 2011 and 2012. As a result, shares of EnerNOC plunged from $35 in early 2010 to just $6 by the summer of 2012.

These days, shares are back up into the mid-teens as the company has resumed a growth trajectory. Analysts expect sales to grow 35% this year, to around $380 million, with revenues likely to exceed $450 million next year. Equally important, a company with a history of operating losses has become profitable with earnings of about $1 a share expected next year.

Risks to Consider: These companies' products and services fall into the category of discretionary spending, and demand can wane if the economy slumps and companies restrict their spending to necessities.

Action to Take --> Both Ameresco and EnerNoc are trading well off of their highs. EnerNoc's revenue trends are already improving, though Ameresco's rebound will take longer to play out. Regardless, these were once seen as some of the best ways to invest in energy efficiency, and as that topic heats up again, expect these firms to again attract a high level of investor interest.

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