Climate Change Investor Newsletter #1
February 2021
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Climate Change Investor Newsletter #1
Introduction
Most business leaders and policymakers concur that climate change is a genuine phenomenon. Even climate change skeptics/deniers have to admit that they’re in the minority in holding the view. While disagreements remain as to the severity of the eventual outcome, governments worldwide are beginning to wake up to the realities of mitigating climate change’s effects.
Almost every business will be touched by climate change. Indeed, it’s hard to think of a single business that isn’t already being affected by it — insurance, transportation, food, energy generation, packaging, logistics, agriculture, finance, real estate, mining, construction, engineering, tourism, and manufacturing will all need to change in order to mitigate the effects of climate change.
When hockey great Wayne Gretzky was asked what his secret was, he responded that he was always skating to where the puck was going to be — a valuable metaphor for success in investing as well as sports.
And that’s the essence of my thesis for this newsletter, today and in months and years ahead: governments and businesses will have to address the impact of climate change, and businesses that help them do that will benefit.
Whether you’re investing for social impact or simply to increase your wealth, it makes sense to focus some of your attention and capital on businesses that will help respond to climate change.
Not Too Late
Although it’s true that many investment products are already focusing on climate change, we are still in early days for the category as an asset class.
A 2019 report by Price Waterhouse Coopers showed that venture capital, which by its nature leads public markets, is intensely focused on privately held “green tech” companies. In 2013, venture capital put $418 million into green technology; by 2019, that figure had exploded to $16.3 billion. Nearly half of that sum was spent on companies in North America. And few signs show this trend abating.
Private equity, too, is starting to focus on climate change. Part of this is driven by market factors — they are good businesses — but part of it is also driven by clients, such as trusts and pension funds, that are keen to show ethical stewardship of their funds as well as favorable investment returns. One of the largest PE funds, Carlyle, is now putting nearly all investments through a screen that includes a focus on climate change.
Hedge funds, too, are beginning to look for Alpha (benchmark-beating returns) in businesses that will respond to the effects of climate change. For example, the manager of one of the most profitable hedge funds in the world, TCI Fund Management’s Chris Hohn, made it clear in 2020 that he would name and shame any portfolio companies that did not have a climate change action plan in line with the Paris Climate Action Plan. With $30 billion under management, Hohn’s words carry real weight. Several managers announced plans in 2020 to raise new pools of capital to invest exclusively in public and private companies responding to climate change.
Put simply, climate change businesses are an industry that is hitting its stride. In a September 2020 article, Forbes magazine wrote, “There is an absolutely gigantic wall of money moving into environmental stocks and it is only going to get bigger.”
A basket of 56 global companies poised to benefit from climate change (prepared by Saxo Bank) showed an incredible 78% return compared to 24% for the S&P Information Technology Sector.
Stay Laser-Focused
It might be tempting to throw a certain amount of capital into one of the several mutual funds or exchange-traded funds that concentrate broadly on “green” companies, but I argue that picking specific equities is more likely to generate index-beating returns. If you’re interested in ETFs, however, here are some.
That’s why I am going to talk in specifics about several equities I’m currently long and why I think they’re going to remain well-positioned to benefit from both governments and businesses responding urgently to climate change.
Clearway Energy (CWEN): According to its investor relations page, CWEN is “a leading publicly-traded energy infrastructure investor focused on modern, sustainable and long-term contracted assets across North America. Clearway Energy’s environmentally-sound asset portfolio includes over 7,000 megawatts of wind, solar and natural gas-fired power generation facilities, as well as district energy systems.”
My investment thesis for CWEN should be self-evident: it is a one-stop shop for sustainable power generation. While a lot of attention has been paid to Tesla because of its supposed green benefits, people forget that a huge amount of the world’s electricity is still generated the old-fashioned way: by burning coal. As governments start to shun climate-unfriendly coal, they will look for more sustainable sources of electricity, and CWEN has impressively demonstrated its ability to produce it and attract customers. Not only that, but it’s got a solid 3.6% dividend yield and it expects to raise the dividend again soon.
Solar Edge (SEDG): A “picks and shovels” play in the climate change space, Solar Edge produces the turbines, inverters, and other components that go into photovoltaic (PV) cells which convert DC current to the AC electricity that’s used in most homes and businesses. The stock benefited significantly after President Biden’s victory in November 2020 on expectations that his administration would shift toward more green power. Its FY 2021 revenue is expected to rise 19% to $1.7 billion, and it continues to crush earnings per share (EPS) estimates.
Tellurian (TELL): Tellurian is developing a clean liquid natural gas (LNG) project at a location in Louisiana called “Driftwood” that expects to eventually produce $2.1 billion in annual cash flow. Tellurian has a secret sauce, though — its president, Charif Souki, a Lebanese immigrant to the United States, started LNG industry leader Cheniere in 1996. He left the company after a dispute with Carl Icahn and went to Tellurian. Together, the management team at TELL helped build nearly 20% of the world’s LNG production capacity — they know their business. The stock was trading at $8/share in January 2020 and dropped below $1 during the COVID-19 crisis. The company’s business presentation, however, estimates that the stock will be worth $12–17 dollars when the so-called “final investment decision” (a term of art in the energy industry that refers to conclusion of a project that can then start producing energy) is reached, and that it will eventually generate $5–7 of free cash flow per share.
MP Materials (MP): Rare earth (RE) minerals, which Merriam Webster defines as “any of a group of chemically similar metallic elements comprising the lanthanide series and (usually) scandium and yttrium” are vital to the manufacturing of smart phones, cameras, LEDs, flat screen televisions, computer monitors, and a variety of national security applications such as aerospace components. The problem is, the United States doesn’t have much in the way of RE production/refining capacity; most REs are mined and refined in China. Enter MP Materials. The company manages the only integrated rare earth mining operation in the United States, the Mountain Pass mine in California. For a mining operation, it’s surprisingly sustainable, recycling 95% of the water used in the process. China has set itself up as the de facto hegemon in RE production, which is why the Mountain Pass mine is so important — it’s not unthinkable that the US Government might someday become MP’s biggest customer if China decided to weaponize its dominance in RE production, which is a very real possibility.
TPG Pace Beneficial Finance Corporation (TPGY): This is a Special Purpose Acquisition Company (SPAC) that in December 2020 announced its intention to combine with the EVBox, a European energy services company. The transaction will allow EVBox to expand its already impressive reach in developing and manufacturing electric vehicle charging stations and their accompanying software. EVBox is a leader in this field on the European continent, with 190,000 charging stations servicing 2,000,000 EV drivers. As EV adoption expands in both the United States and Europe, EVBox is positioned to remain at the forefront of the charging station market.
Tattooed Chef (TTCF): From their investor relations page: “Tattooed Chef is a leading plant-based food company offering a broad portfolio of innovative plant-based food products that taste great and are sustainably sourced.” Originally founded as a different company in Italy, TTCF rebranded and has had a compound annual growth rate (CAGR) of 63% over the last five years. Its line of plant-based frozen foods has now expanded to nearly 40 items and they expect to add another 24 products in 2021. They’ve been able to achieve remarkable growth with no marketing or brand investment whatsoever, and they have distribution deals with Costco, Sam’s Club, Walmart, 7–11, Whole Foods, Kroger, and a bunch of other well-known stores. At around $25/share it might be overvalued for the short run, but I believe over the longer term, it has the promise to become an industry leader in the $380 billion frozen food market.
Abaxx Technologies (ABXXF): Warning: this is a small position which is very speculative! Put simply, Abaxx is a technology company which produces software for managing commodity exchanges, but with a difference. Their first project (and the reason I consider it a form of green investment) is to create and manage a spot market for LNG in Singapore. Demand for LNG in Asia is poised to explode (cf. TELL) and unlike with many commodities, there aren’t many current spot markets for LNG. The company has a very solid team, with a CEO/Founder who was Senior Commodities Strategist at Goldman Sachs, so he knows the space inside and out. Over the longer term, though, I think the unique product the company develops (which is highly integrated with blockchain technology) has the potential to disrupt the entire commodity trading industry, including precious metals, energy, and agricultural commodities. Since we are arguably at the beginning stages of the next commodity supercycle, this is a serious potential disruptor (bearing in mind that it is always possible that one of the established players in the space could theoretically get to market before Abaxx). As I said above, however, beware as this is very speculative.
Conclusion
I hope you found this first edition of the newsletter helpful. 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 next edition, I plan to discuss some of the equities I’m watching and/or would buy on any kind of market pullback.
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 personal 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. Please do your own research. Consult a financial professional on all investment decisions. © 2021 Marc Johnson
