This article is part of our Rising Stars Portfolio Series.
Today's boiling temperatures remind us all that 2011 has been extremely hot. Earlier in the year, Savannah, Ga., experienced 56 days in a row with 90+ degree temps, an all-time record streak. A few weeks ago, Childress, Texas clocked in at a sultry 117 degrees, the hottest day ever since the town started keeping records in 1893. The heat has been oppressive – but not enough to keep me from thinking about investments that might benefit from the summer's superlative sizzle.
Providing energy to crank up the A/C
Extreme temperatures strain the energy grid. Electricity demand normally spikes in summertime, but when all those air conditioning units kick into high gear at once, the grid gets overwhelmed, risking a blackout. Electric utilities must then purchase excess electricity on the spot market, or fire up extra plants. Unfortunately, both these options cost a whole lot.
But there's a third option: demand response. DR companies have a network of relationships with heavy energy users, whom they ask to cut back when the grid is stressed. The utilities can then divert that unused energy to other areas where it's needed more. The utilities have to pay for this right, of course, but so long as the price is less than what the spot market charges for additional juice, it tends to be a good deal.
The largest player in the DR market is EnerNOC (Nasdaq: ENOC ) , now trading near its 52-week low. As a middleman, EnerNOC always risks getting cut out of the deal. But its business relies on data that utilities don't have, and the company's adding stickiness to its energy user relationships by selling other efficiency solutions.
Making A/C green
When it's hot out, people and businesses simultaneously appreciate their air conditioners and curse their electricity bills. AAON (Nasdaq: AAON ) is a founder-led company that competes in the rooftop heating, ventilation, and air conditioning (HVAC) market, producing energy-efficient rooftop HVAC units that help save its customers money.
During the last two years, AAON has increased its share of the market. High demand and product acceptance have driven the company to increase its budget for capital expenditures, which should enable it to efficiently produce its units in years to come. And although demand from new construction remains weak, hurting the company's sales, AAON has been able to remain profitable by generating 45% of its sales from the replacement market. With depressed sales and temporarily high expenses, now may be the time to plug into AAON.
Listen for the ice cream truck
Nothing beats the heat like an ice cream cone. If you're too concerned with your waistline to enjoy a frozen treat, chances are you'd at least reach for a bottle of water. In either case, Nestle (OTC: NSRGY) will gladly take your money. Among its continuing operations, Nestle earns 28% of its revenue and 23% of its operating profit from its water and milk products/ice cream divisions. The company stocks vending machines with its frozen treats and fills bowls with scoops of Dreyer's and Haagen-Dazs.
The rest of Nestle's business is extremely stable, benefitting from its immense geographic reach and established distribution network. And the company's aggressive push into nutrition and wellness will be a wise long-term move. With an enterprise value-to-free cash flow ratio of only 11, shares look as refreshing as a bottle of Perrier.
The Foolish bottom line
A heat wave isn't enough to justify a long-term investment thesis, but the sweat beads on our foreheads can at least direct us to promising opportunities. EnerNOC is currently unloved, AAON is virtually unknown, and Nestle's transformation into a healthy-living company is a bit misunderstood. I'm watching each as a potential addition to the Un Portfolio. You should put them on your watchlist, too.
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