A Small Beneficiary of Obama's Big Plans

03/09/2009 10:49 am EST

Focus: STOCKS

James Oberweis

Editor, The Oberweis Report

James Oberweis, editor of The Oberweis Report, discusses President Obama's budget proposals and mentions a small pollution-control company that might profit from them.

President Obama's 2010 budget blueprint will reshape the laissez-faire principles implemented by the Reagan administration nearly 25 years ago.

In what we call the Robin Hood clause, the plan proposes an increase in the highest marginal tax rates to 39.6% from 35%. The proposal also reduces the utility of itemized deductions for high earners and increases their capital gains taxes from 15% to 20%. Lower- and middle-income earners will see some tax relief, resulting in a redistribution of wealth from the affluent to the less affluent.

Marginal increases in high income tax rates and increases in capital gains taxes have historically been detrimental to overall economic growth and have not encouraged bull markets.

At the industry level, Obama's budget rings true to his campaign promises. The big losers, as expected, are oil and gas, defense, parts of health care, agribusiness, and hedge funds.

Among the winners, banks appear to fare well, with additional rescue monies (aka subsidies). Clean energy producers like solar, generic drug makers, and pollution control companies also stand to benefit. Fossil fuel producers could face a hit of up to $100 billion if Congress heeds the President's request to abolish what he called "oil and gas company preferences" in the tax code.

He also calls for a so-called cap-and-trade system, which penalizes carbon emissions and forces energy companies to buy an allowance or permit for every ton of carbon emissions. New portfolio addition Fuel Tech (Nasdaq: FTEK), which helps coal power plants sharply reduce emissions, stands to benefit.

Fuel Tech. provides a suite of advanced technologies for boiler optimization, efficiency improvement, and air pollution reduction and control solutions to utility and industrial customers worldwide.

The company's nitrogen oxide (NOx) reduction technology reduces NOx emissions in flue gas from boilers, incinerators, furnaces, and other stationary combustion sources. The US air pollution control market is the primary driver in Fuel Tech's NOx reduction technology segment. This market is dependent on air pollution regulations and their continued enforcement. Fuel Tech also sells NOx control systems outside the US, specifically in Europe and in China.

In the company's latest reported third quarter, sales increased approximately 55%, to $23.7 million, from the third quarter of last year. Fuel Tech. reported earnings of nine cents per share in the latest reported third quarter, versus four cents in the same quarter of last year.

The company experienced an unexpected hiccup in July 2008, when the DC Circuit Court of Appeals struck down the Clean Air Interstate Rule (CAIR), [which had] led utilities to buy pollution control equipment. Business came to a screeching halt. However, on December 23, 2008, the US Court of Appeals reversed the decision, temporarily reinstating CAIR but also asking the Environmental Protection Agency (EPA) to correct the rule's flaws. A revised CAIR may be even more stringent, not less.

(The stock closed near $7.50 Friday—Editor.)

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