Climate Change Investor Newsletter #2
March 2021
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What I’m Listening to Now
To start with, I would direct you to a recent podcast episode of the “Smarter Markets” podcast, which is hosted by hedge fund manager Erik Townsend (I am not being compensated for plugging this, incidentally, though I have invested a small speculative amount of money in the sponsor of the podcast, Abaxx Technologies (ABXXF), which I mentioned in the last issue of this newsletter).
In the episode, veteran sustainability investor Peter Fusaro (who also organizes the annual Wall Street Green Investing Conference) discusses emerging climate change investing trends, including offshore wind (notably, a new type of generator called induction wind), hydrogen fuel cells, new types of batteries, soil depletion, and sustainable fisheries.
Fusaro believes that we’re in the “first inning” of a green investing disruption cycle, and that the world’s largest businesses — food, energy, and agriculture — are going to be revolutionized by sustainability. While Total, Equinor, and Shell are the first major energy companies to begin to transition away from fossil fuels, Fusaro believes the others — the Exxons, Chevrons, and BPs of the world — will follow, because that is the direction energy demand is shifting.
He also noted that there are 61 — that’s right, 61 — carbon markets worldwide, meaning this nascent industry is highly fragmented. Of those, 31 use emissions trading schemes, while 30 use a carbon tax framework. This is, he says, a prescription for market dysfunction which inhibits price discovery.
He observes that the clean energy industry is $362 billion, which is just 5% of the $6 trillion energy industry. Fusaro believes that the COVID-19 pandemic will accelerate trends already in progress around the “energy transformation” phenomenon toward more sustainable practices through capital and technology.
Those are the highlights, but the whole episode is well worth listening to for a sense of the opportunity ahead.
What I’m Learning About Now
Green Hydrogen: Hydrogen, you may recall from your high school chemistry class, is the most abundant element in the universe, and commands the first position on the Periodic Table. You may also recall that it’s an odorless, colorless gas. So how can it be green?
That begins with how it’s produced. Hydrogen can be made many ways, but the “greenest” (or cleanest from a climate change perspective) is using electricity created from sources like wind or solar power. Hydrogen is produced using a process called electrolysis. Electric current is run through water, which produces hydrogen and oxygen (water is just H2O after all, right?). It also generates a certain amount of energy in the form of heat.
In fact, I just read about a power plant in the Netherlands that is run on both hydrogen produced through electrolysis AND some of the captured heat generated in the process. This heat is then diverted to places that would’ve been otherwise heated using natural gas or some other less green process.
It’s still comparatively more expensive to produce energy with hydrogen, but the same was true of solar, wind, and other technologies not so terribly long ago. As technology improves, the cost of electrolysis will come down, too. And already companies are starting to manufacture higher-capacity electrolyzers capable of making more hydrogen, faster.
If you’re looking for companies that benefit from greater interest in hydrogen, whether green, so-called “blue” hydrogen, or “gray” hydrogen, here are a few:
FuelCell Energy Inc (FCEL), Bloom Energy Corp (BE), Ballard Power Systems (BLDP), and Plug Power (PLUG). I intend to research this sector more but I don’t have an opinion on any of these companies at the moment. As always, do your own research and consult an investment professional.
What I’m Looking At Now
Here are some of the clean energy stocks I’m examining as possible future investments, in no particular order.
Invesco Cleantech ETF (PZD)
This fund, which is set to change its name to the Invesco Sustainable Future ETF in March, holds a variety of clean energy names and is a diversification “pure play” on the sector. Its three largest holdings are Siemens Gamesa (wind turbine manufacturer), Vestas Wind Systems (which I will discuss later), and ABB (a Swiss robotics maker). The only “problem” is that the ETF has gone up more than 100% from its March 2020 lows, from $33 to over $76! It’s massively overpriced, in my opinion. I would consider buying on a pullback around $50.
Nextera Energy Partners (NEP)
It’s the biggest electric utility you’re probably never heard about. From its company profile: “The Company…owns a portfolio of contracted renewable generation assets consisting of wind and solar projects, as well as contracted natural gas pipeline assets.” It’s been an impressive deliverer of value to its shareholders, outperforming its peers and the S&P Utility Index through aggressive growth. Electricity demand is relatively stable year after year, and I expect more demand in the future for “green electricity” (i.e. electricity generated from renewable resources rather than by burning coal) to increase. Blackstone and Goldman Sachs recently added to their positions in NEP, though I should note that these positions are modest in the context of these huge funds. That said, NEP is near an all time high ($72) after dropping in March 2020 to $37. I would be a buyer of NEP around $50.
Vestas Wind Systems (VWDRY)
A Danish company, Vestas has two sides — Projects, which includes manufacturing and sales, and Service, which consists of servicing and spare parts. The Danes were pioneers in the offshore wind space, and Vestas is producing new windmills that can detect ice, smoke, and shadows, and turbines produced by Vestas make up 17% of the global installed base. Fair warning, though, Vestas’ biggest competitor is General Electric, which just announced it’s making the biggest offshore turbine ever produced. Like the last two, I feel like VWDRY has gone too far, too fast. I would be a buyer below $40. (Note also that VWDRY is the American Depositary Receipt for the European company; ordinary shares trade on the Copenhagen Stock Exchange.)
Brookfield Energy Partners (BEP)
In a recent earnings call, the CEO said, “Advancing the transition to a lower-carbon future will require substantial capital, in excess of $100 trillion over the next three decades” (emphasis mine). He thinks his company can take advantage of scale and experience to peel off a substantial portion of that to generate investment ROI. The company produced a 91% total return in 2020. The company has been on an acquisition spree of late, and just bought one of the largest land-based wind farms in the United States. Like the others, though, the share price has benefited from the crazy market environment in which we find ourselves. I would/will buy shares at or below $35.
Enphase Energy (ENPH)
As recently as January 2019, ENPH was trading at $7 a share — the last print I saw had ENPH at $176. It’s come a long way, clearly. The company makes micro-inverters that convert solar-produced direct current (DC) to alternating current (AC) electricity that we use with our appliances and devices. The company has over 300 issued patents and is also has a strong electricity storage system business. The price over $175 is too much in my opinion, and the stock at that price has limited upside potential. I would likely buy some on a pullback to around $125 a share.
What I Bought in February
I continue to keep cash available for the moment that the markets correct, which if I’m honest I’ve been expecting for at least six months. The more irrational the market gets, the more brutal the eventual correction will be. I’ll be ready to be, in the words of Warren Buffett, greedy when others are fearful, because right now everyone is greedy which makes me fearful.
iShares Silver Trust (SLV)
I am convinced that we’re entering the next commodity supercycle, which means that mining and metals will be more important in the near future than they have been in the last few years. In particular, silver is in so many different types of products that I expect the price to move up significantly over the next year or two. In addition, like gold, silver is an inflation hedge, which I think will be important in the next few years. Not only that, you can’t make solar panels without silver. I will add to the position on dips.
US Commodity Price Index, 1795 to present
(Source: Stifel report June 2020; Red dots: major inflation peaks, Blue dots: major inflation troughs)
SPDR Gold Shares (GLD)
Picked up some more GLD for many of the same reasons I bought silver. Many of the miners have cleaned up their balance sheets and are extracting (pun intended) more profit from the gold they take out of the ground. And of course GLD will continue to be the go-to inflation hedge for most investors.
Freeport McMoRan (FCX)
FCX is a play on copper, primarily, but the company also extracts a lot of other materials that are vital to the production of green technology, like cobalt and molybdenum. One study I read suggested that on a discounted cash flow basis, the company was 41% undervalued. The company is already one of the biggest publicly traded copper producers. Put simply copper is the raw material that there just is not enough of (and we can’t recycle fast enough to meet demand), and FCX’s motto is, “Foremost in Copper.” FCX is also a leader in sustainability in mining, and copper is a key component of any homebuilding boom.
Agnico Eagle Mining (AEM)
Agnico, in addition to being one of the best “senior” miners, operates only in “safe” jurisdictions that enforce strict compliance with environmental regulations — currently Canada, Finland, and Mexico. The company is also involved in exploration activity in the United States and Sweden. Among miners, it’s a leader in sustainability, and in addition to gold it also produces silver, zinc, and copper. In its February earnings call the company disappointed analysts with higher than expected production costs, which caused the stock to dip; I used that as an opportunity to initiate a small position. The average analyst price target is $88, which implies a 33% discount of current share prices.
Tellurian (TELL)
I added to my Tellurian position. I explained my investment thesis for TELL in the February newsletter.
I am/We are Long
CWEN, SEDG, TELL, MP, TPGY, TTCF, ABXXF, SLV, GLD, FCX, AEM.
Conclusion
Hope you enjoyed the second edition of the newsletter. I believe there will be a lot more to say in coming months and years, and I hope you’ll come along on the ride with me. For the April edition, I plan to look at some emerging technologies in the climate change space.
About
The Climate Change Investor is published by Marc Johnson, an investor with over 25 years of experience in public and private markets. An avid consumer of financial research and new technologies, he believes that remediating climate change is both a moral imperative and an incredible business opportunity.
Disclaimer
Marc Johnson and the Climate Change Investor Newsletter are not registered investment, legal, or tax advisors, nor are they broker/dealers. Any content contained herein should not be considered financial advice. All opinions are based on research by the publisher of the newsletter and are intended as educational material only. Although best efforts are made to ensure the information is accurate and current, occasional unintended errors and misprints may occur. Conflicts may be hidden or obscured. Do your own research. Consult a financial professional on all investment decisions. © 2021 Marc Johnson
