2 Sustainable Stock Ideas

This article is part of our Rising Stars Portfolio series.

Most of us probably don't think too much about carpeting; after all, it's way down there. However, two publicly traded carpet manufacturers are doing what they can to cushion your steps and create a cleaner, greener industry: Interface (Nasdaq: IFSIA  ) and Mohawk (NYSE: MHK  ) .

Environmental concerns from conventional carpets can include indoor air quality, emissions from manufacturing processes and disposal, and solid waste impacts, according to the Environmental Protection Agency. As more and more people pay closer attention to green living and working these days, carpet companies that have devised ways to lighten their environmental footprints could be very attractive investments, especially for SRI investors. Let's take a closer look.

A sustainability veteran
Atlanta-based Interface has been working on profitable environmental sustainability for years now. Ray Anderson, who founded the company in 1973 and is now chairman, was described in a 1998 Fast Company article as a "certified captain of industrial capitalism," as well as "one of the nation's leading environmentalists, a radical who makes the folks from Greenpeace look timid."

In 1994, Anderson called for Interface to refocus on becoming "the first company that, by its deeds, shows the entire industrial world what sustainability is in all its dimensions: people, process, product, place and profits -- and in doing so, become restorative through the power of influence."

Last November, Interface raised the bar on its Mission Zero sustainability initiatives, through which the company intends to eliminate its products' environmental impact by 2020. Interface plans to get third-party validated environmental product declarations (EPDs) on all its InterfaceFLOR products by 2012. Its website includes a complex list of ways it can achieve Mission Zero, as well as the challenges it faces.

A major part of Interface's goal lies in turning customers into suppliers, by recycling its old carpets into new ones. Interface seems to be a veteran at designing lofty goals for its old-school business.

This isn't your green Mohawk from 1987
Rival carpet manufacturer Mohawk Industries, based in Calhoun, Ga., has its own share of eco-friendly business initiatives as well. According to the company's website, it has a PET recycling plant in Summerville, Ga., where it processes 20% of all plastic containers in the U.S. and recycles them into carpet fibers. Mohawk's Mexican tile factory recovers and reuses all of its wastewater.

The company's "Green Works" website shows off its environmentally responsible attributes with pizazz (including a real-time ticker count of PET bottles that have been recycled into carpet yarn, pounds of tires that have been recycled into doormats, and pounds of waste that were diverted from landfills).

Last fall, Newsweek magazine released its list of The 500 Greenest Companies for 2010, a list that included huge companies such as Dell, Hewlett-Packard, and International Business Machines. The methodology screened for the largest U.S. companies, then crunched a Green Score from three component factors: Environmental Impact Score, Green Policies Score, and Reputation Survey Score. Mohawk Industries made the list at No. 350.

The green pair's too pricey … for now
Both companies fit well in the universe of companies I'd consider buying for my socially responsible portfolio, and they're both on my watchlist.

For now, though, I'm leery of Interface's price tag: it's trading at 20 times forward earnings, with a PEG ratio of 2.00. Its stock price has increased more than 115% in the last 12 months, which also gives me pause.

I lean a bit more favorably toward Mohawk, given the many clear examples of the environmentally responsible work it's doing. However, trading at 18 times forward earnings and a PEG ratio of 1.65 doesn't make Mohawk look like any outrageous bargain, even though it's a tad cheaper than Interface.

I might be inclined to feel more comfortable with high valuations for these stocks, given their focus on operating in less wasteful, more environmentally friendly, and theoretically more profitable and growth-oriented ways. Unfortunately, I'm not feeling bullish enough on the broader economy to expect much growth in carpet sales in general for the time being. I'd imagine that even a magic carpet manufacturer might have a hard time garnering robust sales these days.

While I wait for cheaper prices, I'll be keeping my eye on both of these interesting, sustainable stocks. After all, they're doing exciting things in industry with no reputation for sexiness or sustainability. Either company would make a solid addition to a socially responsible portfolio.

Do you have any thoughts on Interface, Mohawk Industries, the industry at large, or green initiatives? Please share them in the comments box below.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

The Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (11)

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  • Report this Comment On February 04, 2011, at 9:19 PM, NovaB wrote:

    Interface pays an 8-cent dividend. What's the point?

  • Report this Comment On February 06, 2011, at 2:26 PM, ScottRichard wrote:

    "...especially for SRI investors." Hmmmm, I haven't invested in Stoneridge. Oh, maybe it means, "seriously reclusive idiots". Probably not.

    Acronyms only work for the general public when they are universally understood or "decoded" within the context of the message. Those qualifications make their use by serious journalists often unwise.

    LOL

  • Report this Comment On February 06, 2011, at 5:31 PM, TripleEFocus1 wrote:

    Alyce, thanks for the article. I bought Interface when it was down at $3.09. With other purchases my return so far is 116 percent. Profiting while caring for People and Planet (3P) makes for a wealth creation everybody can share in. Appreciate your insight.

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