Plastic Lumber Doesn't Stack Up

In my Friday Daily Blog Watch, I linked to a post on InvestorGeeks that made a case that Advanced Environmental Recycling Technologies (AERT - commentary - Cramer's Take) is a potential 10-bagger. AERT is a small-cap company that makes "plastic lumber" -- a composite building material containing recycled polyethylene plastic and waste-wood fiber.

I received an interesting email in response from Terry Foecke, a savvy research analyst (see the returns below on prior picks of his I've featured) who specializes in green investing for a Minnesota-based money management firm called Riverbridge. Foecke has a negative take on the stock, but he recommends another one in its industry as an alternative. He kindly agreed to allow me to share his analysis with RealMoney readers.

I wrote an article last August on Foecke's approach to green investing; I recommend that you look at it to get a deeper perspective on his views, which are very different from the typical "do no harm" green investing.

Here he is on AERT:

My fundamental take on AERT is pretty negative.

Plastic lumber is not a direct replacement for wood. It is often more expensive, it has a lower modulus (bends and stretches more) and cannot be used in structural members (no standards = no insurance -- builders would be nuts to use it). The demand side of this will be restricted until a better product is available.

The recycled content is increasing in price, and not just because of oil prices. China sources quite a bit of waste plastic here, and users there are not at all fussy about dirty inclusions. And the economics of recycled feedstocks teeters on the assumption that political jurisdictions will continue to subsidize the collection of things like high-density polyethylene (HDPE) bags and milk bottles. Collection programs are already being forced away from single-stream (sorted) materials. It is a lot easier to pull out the batteries and dead bodies and burn this stuff in a high-end incinerator.

HDPE (flimsy) plastic bags are also being forced out of commerce. A growing number of countries ban them (I believe it is South Africa that calls escaped plastic bags fluttering from trees the national bird) and even more require charges or other fees.

Recycling like AERT's is not avoided landfill, but merely delayed. And once mixed into plastic lumber, the components that once had BTU value become trash.

I don't have criteria for spotting potential 10-baggers, but in plastics, I am happier betting on Landec (LNDC - commentary - Cramer's Take) than AERT. It is solving real problems and facilitating environmental progress.

Landec makes specialty polymer products, such as breathable plastic packaging for the produce industry and temperature-activated seed coatings that prevent seeds from absorbing water when the soil is cold enough to cause damage. It also licenses its technology for use in personal-care products.

This small-cap has a great balance sheet, with $20 million in cash and only $2 million in debt. It generates about $10 million in operating cash flow a year with steady growth.

In my article last August, Foecke recommended three stocks: Baldor (BEZ - commentary - Cramer's Take), Symyx (SMMX - commentary - Cramer's Take) and Sasol (SSL - commentary - Cramer's Take).

As a group, these stocks have done very well. While the S&P 500 has gone up about 1% since then, Baldor is up 27% and Sasol 15%, while Symyx has fallen 16%, for a combined return of 8.66%.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider AERT and Landec to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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At the time of publication, Altucher and/or his fund held none of the issues mentioned, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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