Where Do You Draw The Line?

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We’ve had a running debate in the office for the last month.

The subject boils down to the tradeoff between investing for profit, and investing with a sense of morality. Now I wouldn’t classify myself as a socially responsible investor – not that there is anything wrong with that strategy. I just believe there is always a hole to be punched in any company’s social agenda, if you’re willing to look hard enough.

In my eyes socially responsible investing often comes down to investing in companies that are doing ‘less bad’. I have yet to find a company that has a clear net positive impact on the environment, when considering the full cradle to grave lifecycle of products, services, and inputs to the company.

I’m all for doing things ‘less bad’, but I only want to invest in these companies if they are going to earn me money. There are other avenues for activism and charitable giving, and I support a number of causes when I feel compelled to do so.

But I also don’t want to invest in companies that are doing bad things, whether intentionally or not. So when Kevin McElroy, editor of the Resource Prospector, and I sit down to discuss the compelling valuation of BP (NYSE: BP) right now, I’m torn. Especially because I owned shares in BP before the company’s rig exploded.

***As you know, the oil leaking into the Gulf of Mexico came from the Deepwater Horizon rig, which was operated by BP. The rig itself was owned by Transocean (NYSE: RIG), and so far has dumped at least 5 million gallons of oil into the Gulf of Mexico.

And it appears the oil has gotten into the Loop Current, which is likely to bring it through the Florida Keys and up the East Coast. Scientists say the oil should lose most of its toxicity by the time it reaches land on the East Coast. But that’s one more in a long list of ‘not that bads’ that when taken together are pretty awful.

Image Courtesy of The Wall Street Journal

By yesterday afternoon, nearly 20 percent of federal Gulf waters were closed to fishing because of spreading oil. The financial impact to Gulf businesses, and residents, is sure to be felt for decades. The environmental impact will last equally as long.

***There is a ton that can be said about this ordeal. It is easy to make a case that we’re all complicit because of our dependence on oil. It’s equally easy to point the finger of blame at BP and Transocean because of their direct involvement. Kevin is quick to point out the first case – I’m more committed to the second.

Saying we’re all complicit in this environmental disaster because we drive oil fueled cars is like saying we’re all responsible for the nuclear meltdown at Three Mile Island because we used electricity. No.

We’re consumers, not CEOs. The buck stops at the top, and it’s the responsibility of companies to control risks. To its credit, BP is accepting responsibility, and hasn’t capped its liability for this disaster. I haven’t heard BP Chief Executive Tony Hayward say consumers are just as complicit as BP and Transocean.

***But regardless of where you fall on the responsibility spectrum, pointing the finger of blame is backward looking. And opportunities reside in the present and future. So the question now is should you go out and buy stock in BP since its paying a 7.2% dividend and the stock has fallen 24%? What about Transocean? It has a PE of only 7 and has fallen nearly 30%.

One of my research analysts, Tyler Laundon, says he’d have a hard time sleeping at night right now if he purchased shares in BP. He’s also a hobbyist fisherman, and gets more than a little worked up when I ask him how he feels about oil slicks floating around the ocean. He says at the end of the day, we have a responsibility to act as caretakers of the planet, not just consumers of it.

For my part, I’m not a buyer right now. I owned shares of BP before the rig explosion, and while I’m sure not selling them, I’m not buying more. I’m attracted to the yield, and the valuation, but I’m concerned that the dividend might not be safe. I’m a little uneasy about the financial impact to the company of the spill.

I think there is a better way to play the trend right now, especially for small cap investors. Why try to profit on the problem, when you can profit on the solution?

There are three small cap stocks that are lending a hand cleaning up the oil. I’m not saying these are perfect companies from a socially responsible investing perspective. But they are helping to clean up this mess. 

The three companies are Clean Harbors (NYSE CLH), Nalco Holding Company (NYSE: NLC) and Lakeland Industries (Nasdaq: LAKE). I’ll take a closer look at each of these tomorrow. Their stocks all shot higher in the wake of the disaster, but have since pulled back. Take a look at them and let me know what you think as well. My address is: editorial@smallcapinvestor.com 

***So what do other investors think?

I found a survey that TheStreet.com  has put out asking readers if they think “there is a value play among the stocks caught up in the BP oil spill crisis”. The survey asks 6 questions, but there are two that are the most relevant to my discussion today.

It turns out that 43 percent of the survey’s 2,020 readers believe BP is the value stock to buy, while 21 percent are staying away from all the stocks involved (including BP, Transocean (NYSE: RIG), Halliburton (NYSE: HAL), Cameron (NYSE: CAM), and Anadarko (NYSE: APC)).

This is a small survey sample, but it’s clear that investors are coming down on all sides of this issue.

Where do you fall? Drop me a line, my address is: editorial@smallcapinvestor.com.