Standing next to former President Bill Clinton, billionaire businessman Richard Branson dropped a bombshell on Wall Street last week. For the next 10 years, he will invest every penny of profit earned by Virgin Group's transportation companies in renewable energy businesses.
(Pause for applause.)
Unfortunately, for all that he's accomplished as a brilliant showman and a successful businessman, Branson's getting off on entirely the wrong foot as an investor. His first investment in the fight to halt and roll back global warming is -- wait for it -- ethanol.
(Audible sigh.)
15 minutes ago
The problem is that investing in ethanol is so 15 minutes ago. Since Archer Daniels Midland (NYSE:ADM) set off the ethanol arms race, its stock doubling on corn-fed dreams, at least three other ethanol companies have come public. First, Pacific Ethanol (NASDAQ:PEIX) opened at $10 and promptly tripled in price before losing half its value over the past six months. Then came VeraSun (NYSE:VSE), which is well on its way to losing half its value from its IPO price, skipping any intervening rise. And most recently, we've seen Aventine (NYSE:AVR) attempt to set a new world record for losing half its value post-IPO, at two months and 20 days flat.
So while it's with a heavy heart that I say this, I fear that Branson's investment in just-founded California ethanol maker Cilion is unlikely to either save the world or earn him great returns. Like the product they sell, these firms' shares simply cost too much. Meanwhile, investors are voting with their pocketbooks against the chances of the ethanol companies' survival, convincing Hawkeye Holdings, for one, to postpone the IPO it had scheduled for last week.
Charity or investment?
Of course, it's possible that Branson doesn't care about the economic viability of these businesses. Some reports on his offer suggest that he's "giving" away $3 billion. If that's indeed his aim -- to funnel money into cash-burning businesses in hopes of keeping them afloat until they become self-sufficient, then more power to him. There are literally dozens of such alternative energy plays on the public markets (let alone private companies) that would be happy to accept his billions. Take fuel cells, for instance. FuelCell Energy (NASDAQ:FCEL) and Millennium Cell could certainly use the cash. Plug Power and Ballard Power (NASDAQ:BLDP), too. They're all "green" companies -- and they could all use an infusion of Branson's greenbacks, because they're not making any of their own.
That said, the vast majority of the articles I've reviewed characterize Branson's offer not as a charitable donation but as an "investment" in renewable energy -- meaning the man wants a return on his investment.
Move away from the corncob
If that's his true aim, though, then I'd suggest Branson steer clear of both ethanol and fuel cells for the time being. Altruism's all well and good, and we should all applaud people willing to fund unprofitable and barely profitable alternative energy researchers for their efforts to "keep hope alive." But they, like Branson, need to understand that buying shares in these companies isn't investing -- it's charity.
At The Motley Fool, we support both charity and investing, but more importantly, we know the difference between the two. Every year, we hold a Foolanthropy drive to support worthy charitable causes. And six months ago, Motley Fool Rule Breakers embarked on its own quest to identify the most promising investments in the field of alternative energy. We've come up with three ideas so far, and we're not done yet.
In the interests of international goodwill, saving the Earth, and helping Branson to do well by doing good, we offer up our first alternative energy idea for his consideration. I think he'll like it:
Clean coal (it's not just an oxymoron anymore)
Last spring, we recommended that Rule Breakers subscribers invest in Headwaters (NYSE:HW), a company that's doing its darnedest to make the most dirty of fossil fuels -- coal -- into a clean source of energy. In essence, Headwaters takes the byproducts of coal burning, captures them before they become atmospheric pollutants, and converts them into clean-burning synthetic fuel. The firm also captures "fly ash" produced from coal combustion and transforms it into a range of products that can be used in construction, and it's working in the field of liquefaction to transform solid coal into synthetic diesel fuel.
But here's the best part: Headwaters is profitable -- and cheap. Over the past 12 months, the firm has generated $147 million in free cash flow. Weighed against its $1.6 billion enterprise value, Headwaters sells for an EV/FCF ratio of just 11 -- giving investors a chance to make the Earth a cleaner place and earn a bundle in the process.
That's just one of the three Rule Breakers recommendations focusing on alternative energy. The other two are just as exciting, and one of them is also already profitable. You can read about both for no charge, with a free trial to the newsletter.
Fool contributor Rich Smith does not own shares of any company named above. If he did, the Fool's Rules would require that he tell you so. Contrary to popular opinion, he does not hate fuel cell companies -- he just hates the idea of people losing money on them.
