3 Sustainable Investment Options

Saving the planet is pretty important for some people, and I’m guessing it’s at least a vague thought in your head. After all, you are reading a website called Sustainable Personal Finance.

But as we’ve argued in the past, there needs to be some sort of incentive for people to do the right thing. Governments have done a good job with this in the past by doing things like paying people to recycle, giving tax breaks for people who install their own solar systems or buy electric cars, or by encouraging research into promising new technologies.

It’s the same thing when it comes to investing. The object of that game is to make money; saving the world is a secondary (at best) goal. I guarantee any environmental thoughts go out the window when someone doesn’t have enough to afford to eat in retirement.

Fortunately, there are investments out there that allow environmentally-conscious folks to have their cake and eat it too. Here are three investing ideas that would look good in every tree hugger’s portfolio.

Renewable power

As technology has improved, Canada’s power generators have abandoned fuels like coal and even natural gas, choosing to invest in hydro, solar, and wind projects. These projects generate cash flow day one, and there will likely be plenty of demand for more of them over the long-term.

There are a few different companies in Canada that focus on renewable energy, and unfortunately for folks who don’t really like to pick stocks, no ETF exists that allows you to get broad exposure to the sector without having to buy individual stocks.

Four of the top renewable power stocks in Canada are Brookfield Renewable Partners LP, TransAlta Renewables, Northland Power, and Innergex Renewable Energy. I’m not entirely sure which one is best, so I’d just buy all of them, creating my own mini ETF.

General Motors

I know, the maker of some 10 million gas-guzzling cars per year doesn’t really seem like a very green choice. But hear me out.

General Motors knows where the future is, and is taking steps to ensure it’s in the lead when that time comes. It already introduced the Chevy Volt, an electric car which was met with mixed reviews. Some people loved their Volts. Others mocked the concept throughly. The next generation of electric vehicles called the Bolt come out soon.

General Motors has something like 4,500 engineers working on building engines that don’t run on gasoline. And many of its other engineers are working on ways to make existing engines more efficient.

General Motors isn’t alone with this investment. Its competitors are pouring many billions more into new technology, much of it going towards electric motors and other green-friendly initiatives. By investing in the sector, regular people are encouraging this research to continue.

CO2 Solutions

CO2 Solutions is definitely not for the faint of heart. You’re nuts for making a company like it a major holding in your investment portfolio. But it could also be a game changer.

The company sets up carbon capturing technology on things like power plants, oil and gas production, and cement and metal industries, which helps these polluters cut their carbon footprint. It then sells this carbon back to industries that need it, like greenhouses, fizzy drink producers, water treatment plants, and pulp and paper mills.

The company claims costs for their technology are 35-60% less than their competitors, with the added benefit of generating no toxic waste. Both private enterprise and governments seem pretty interested in the technology.

There’s only one problem. The company hasn’t really built any yet. It not only doesn’t make money, it doesn’t even have revenue.

That’s a huge problem.

It does have enough in the bank to last it a while longer, and both the Alberta and Quebec governments have given it grants towards building pilot projects in both provinces. So it is making progress, but still remains an incredibly risky investment, albeit one with huge upside.

Conclusion

You don’t have to sacrifice investment returns by going green. Each of these ideas has considerable upside potential, although with varying degrees of risk. As always, do your own research before investing.

Stock Arbitrage: Tread Carefully and There Are Profits to be Made

When people think of Warren Buffett, the greatest investor of all time, they often focus on his knack for picking cheap stocks, or the extra free leverage gained by his massive insurance operations, or even Berkshire Hathaway’s new focus of buying whole companies to add to its already impressive empire.

What doesn’t get much attention is Buffett’s skill in stock arbitrage, a skill which has accounted for a surprising amount of his ability to generate wealth.

What exactly is stock arbitrage and how do investors use it to make money? Let’s take a closer look.

The basics of arbitrage

Arbitrage is the act of buying in one market and selling in another, taking virtually guaranteed profits in the process.

Say the price of gold was $1,000 per ounce in London and $1,005 per ounce in Paris. Since gold is gold no matter where it trades, a person could make a risk-free profit by loading up on gold in London and then selling it immediately in Paris.

Since information now moves so quickly, these types of situations never happen anymore. However, investors can still make money on stock arbitrage by investing in events that have a very high likelihood of happening.

The easiest situation is a friendly acquisition, like a company buying a competitor. Say shares of the competitor trade at $20 per share before the offer comes in. The acquiring company offers $30 per share, and everyone is happy with the deal. Closing is expected to take approximately six months.

In response, the market bids up shares of the target company to $28 per share. There are two reasons why shares don’t immediately trade at $30 each. Firstly, there’s a small chance the deal gets scuttled somehow. Perhaps regulators don’t like the amount of market share this new company will have. Or maybe the buyer’s financing is somewhat sketchy.

The other reason is because of the time value of money. Investors need a compelling reason to put their money into an opportunity. Without being compensated for both the risk and locking up capital that could be put to other uses, arbitrage opportunities wouldn’t exist.

A cash offer is the simplest arbitrage opportunity. Often, instead of offering cash for their prize, an acquiring company will offer a combination of cash and shares, or just shares. Investors can still make money on these sorts of arbitrage deals, but they’re much more complicated. I’d recommend leaving these deals up to the professionals.

Making money on arbitrage deals

There are two keys to making money on these kinds of situations.

Firstly, an investor has to be nearly 100% sure a deal will go through. It takes a lot of successful arbitrage transactions to make up for just one that goes badly.

You have to look at the details of the deal to determine the chances of success. A company with a controlling shareholder who wants the deal to happen is a good thing, for obvious reasons. So is a deal where everyone knows the company being acquired was for sale.

The ability of the acquiring company to buy should also be scrutinized. If a company agrees to pay $100 million for a competitor and it has $150 million in cash on its balance sheet, the deal is much more secure than if the same company has to borrow the $100 million.

Often, a company that needs to borrow the money for an acquisition will talk to bankers before the deal is even announced. Then the company will announce with the deal that financing is already in place. This is a good thing, almost as good as having the cash on hand.

But on the other hand, a company might have no idea where they’re going to get financing once an acquisition is announced. That could be bad news for the deal’s completion, which is what arbitrage investors want to avoid.

What kind of returns?

These days, depending on the deal, investors can expect about a 10% annual return on what I’d call safe arbitrage situations. Returns much greater than 10% annually are out there, but they’re from deals the market thinks are risky.

Generally, investors should be waiting until only a month or two before a deal is scheduled to close. Yes, returns are lower–at least compared to four or six months out–but these deals tend to have a higher completion rate. The key to successfully pulling off this strategy is minimizing losses, not going for the best gains.