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There’s a famous saying in renewables that, “the sun doesn’t always shine and the wind doesn’t always blow.”
That is why…
We need grid resiliency
We need batteries
We need more distributed renewables
We got a disease and the only cure is MASSIVE infrastructure spending.
And Papa Biden plans to deliver.
Last year we saw all sorts of headlines of infrastructure collapses. It was total mayhem in Texas when they got 1cm of snow! Millions were without power as the weather shut down power plants and the demand for heat surged.
Back in 2018, the major utility provider PG&E was found responsible for a raging California wildfire that caused many deaths.
We like to think of North America is well-developed. But crumbling infrastructure says otherwise.
At the same time, there is a push from investors, allocators, hippies, and quite frankly just people with common sense that are now much more focused on renewables.
The integration of intermittent renewables (aka the wind doesn’t always blow) is a big problem to solve, and ties in deeply with this infrastructure upgrade that everyone is talking about.
But there is also much more practical and exciting discussion surrounding the concept of an Energy Transition.
So exciting Elon Musk gushed about it in his opening monologue on Saturday Night Live last night…
So, let’s walk before we run.
This week, in <5 minutes (shorter one this time, after the novel last week!), we’ll cover the concept of the big energy transition:
The Transition Lifecycle 👉 Old guard —> New demand —> Net Removal
Biden’s Infrastructure Bill 👉 Breaking down the dollars
How Grit’s Playing it 👉 Getting to the ‘so what’?
1. The Transition Lifecycle
To make the concept of energy transition approachable, you have to look at it from its full lifecycle in three stages:
i. Energy Transition
ii. New Demand
iii. Circular Economy
Energy Transition
The first stage is energy transition: a change of the old guard and programs that focus on abatement and mitigation of current HEAVY emission violators.
Like your uncle loading up on nicotine patches at Thanksgiving dinner when he’s trying to quit smoking. Bless his soul.
The power sector needs to cut emissions by over 70% to give the US a chance at achieving its 2030 target – which is more than twice the total reduction achieved since 2005.
The elimination of coal generation is much more impactful than doubling the pace of renewable capacity growth though both are needed to achieve Biden's goal of 100% clean power by 2025.
One of the most successful examples of this is a company called Orsted in Europe. This Danish company was traditionally focused on coal-fired power generation, but in 2008/09 saw the writing on the wall and began a black-to-green transition by investing in offshore wind farms and dismantling coal-fired plants.
In 2013, they released a plan to divest all non-core assets and invest earnings from upstream oil & gas into offshore wind and biomass. Originally there was ALOT of skepticism for this plan, and there was some PAIN in the beginning.
But no pain no gain…
By 2016, the company’s wind-power earnings strengthened as they moved up the learning curve and installation costs fell.
The shares generally traded in line with European utility peers for the first 12 months but really took off when it committed to stop burning coal altogether and also sold off its North Sea Oil & Gas business.
Full commit or quit. These guys skipped the nicotine patches and went ‘cold turkey.’
Since late 2016, Orsted has been the best performing European Utility stock (among both renewables and non-renewables exposed companies) and has more than tripled in value.
New Demand
During the elimination of harmful emissions, you have to provide an alternative. Energy creation has to come from somewhere.
No one likes that complainer in a meeting who just sits there and picks at problems.
Don’t bring me problems, bring me solutions.
This is where wind and solar come in. Although natural gas may be providing a bridge as the cleanest fossil fuel, the real step-function occurs when we completely shift to clean energy.
To solve the problem of intermittency, battery technology is rapidly advancing.
For example, if you look at the cost of a lithium-ion battery to power a house, in the 1990s it was $75,000 and weighed 250 lbs, but if you fast forward to 2021, the cost is $2,000 and they weigh 88 pounds. Its almost like a Moore's law effect on a battery level.
We’re getting there.
‘Cleaner’ helps the transition greatly, but we must also keep the ‘100% Clean’ in our sights.
Since in its current form, wind and solar cannot provide baseload demand (minimun amount of energy required to meet minimum energy demands) we also have to look at nuclear until the technology or resiliency catches up.
However, on the nuclear side, there is a lack of capital flow and political will to get new large-scale projects off the ground. Projects also consistently overrun their budgets and experience delays. Great area for the promotion of clean energy… but not super attractive as an INVESTMENT.
I look for both.
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Circular Economy
Amongst the die-hard climate advocates, it’s not simply enough to be carbon neutral. You have to actively participate in a net removal of harmful agents to the system in order to get back to sustainable levels.
Examples of this are companies that are actually taking biowaste materials and recycling them into viable energy sources.
The Paris Climate Accord accounts for technologies that don't even exist yet! So there are bound to be plenty of innovation and solutions on this front that garner more and more public and private support.
I give a great example of this below.
2. Biden’s Infrastructure Bill 👉 Breaking down the dollars
Often when following investing themes, a winning formula is following the money. At Grit we DO THE WORK. We follow capital flows, then drill down on companies within that theme.
To follow the flow, we determine where EXACTLY this massive inflow of fiscal spending is going.
The breakdown of the ~$2T Biden plan, released at the beginning of April, gave much more insight.
Saying a large portion of the bill is on transportation and infrastructure is one thing, but let’s go a step further.
Let’s look at the breakdown of transportation…
Saying “28% of the transportation portion of Biden’s spending bill is on electric vehicles and charging stations” sounds much more like an investment thesis!
A couple of these bullet points are a bit harder to digest. You can buy exposure in public companies to a couple of these themes (which I’ll get to), but good luck getting into more details on “Upgrade Airports” or “Improve Road Safety”….
If we take a look at another category, you’ll see another dollar figure being allocated towards clean energy solutions:
When you have this much money being allocated towards a greener future, this creates jobs and real underlying businesses related in the field. But you need a way to pay for it.
In order to do this, Biden wants to raise corporate taxes as well as increase the personal and capital gains taxes on the highest earners in the system.
So, when evaluating this from a stock perspective, you have to balance the flow of funds with the negative impacts of taxation.
Spoiler alert: Flow of Funds wins.
BUT, before we get to How Grit is Playing this theme…
Let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel and see what he thinks of Infrastructure in America?
All jokes aside… how are we going to make money off this massive influx of capital?
3. How Grit’s Playing it 👉 Getting to the ‘so what’?
Renewables is such an awesome category because it has so many sub-components. If you run a tech fund, you just pick good tech stocks and kind of have a standard deviation around the Nasdaq-100.
This is not the case with renewables. Renewables can span utilities, metals, mining, transportation, technology, and energy. So many ways to play it!
It’s now in vogue for individual companies to commit to being carbon negative (or neutral) by 2030.
There are also seems to be a theme that is in vogue for individual companies to come out and say that they have certain objectives to be carbon negative (or neutral) by 2030.
When it comes to Microsoft, Bill Gates’ net worth isn’t the only thing that’s getting cut in half… Microsoft wants to cut its emissions significantly – even past “half” to be carbon footprint negative by 2030.
The way I like to think about it: take a couple of positions in solid, established players, then take some swings at smaller market cap companies that are a bit more exciting on the innovation front and can get me that sweet sweet 10 bagger.
You’ve heard it before but the 80/20 rule applies here, too.
I’ll start with what I AM buying, then get to what I’m NOT buying.
There is a current theme in the market many people are paying attention to: the rotation from growth (tech) stocks into value stocks.
With a revival of the overall economy and a fierce comeback of the consumer, investors are also starting to focus on cyclical stocks.
Cyclical stocks are in industries that are sensitive to the business cycle, such that revenues generally are higher in periods of economic prosperity and expansion and are lower in periods of economic downturn and contraction.
An example of a cyclical industry is commodities! I’ve written before about copper, but it’s specifically relevant to renewables because EVs can use up to 3.5x more copper than internal combustion engines.
I also wrote in a previous newsletter about how China is moving to be carbon neutral by 2060. China is ALSO the world’s largest consumer of copper, and last year accounted for 51% of total copper consumption worldwide.
Since I wrote this piece on Nov 27th 2020, copper has gone on an insane run to hit a record high. I joke that we might start seeing this happen…
One of the copper stocks that I own in my portfolio (and mentioned on Nov 27th) is one of the largest copper miners in the world, First Quantum. These guys are the biggest and baddest in the biz, and the stock is up nicely since I highlighted it.
I recently started buying (at around $0.74) a SUPER RISKY high flyer copper stock SRHI-T. They were previously close to bankruptcy but then copper took off. They restructured their debt and raised CAD$11MM last month. Over +$300MM has been spent on infrastructure previously. They are ramping up to 34MM lbs of copper production a year now at expected cash costs of $2/lbs. This one could go to ZERO or be a crazy 10x. This is one for the FUN portfolio! More like these coming real soon in my new PAID NEWSLETTER ; )
Copper stocks tap into the theme I mentioned above, as a lot of Biden’s infrastructure spend FOCUSES ON EVs! More charging stations = lower friction of owning an EV. More spent on manufacturing = Optimization of costs that can be passed on to the end consumer.
Dots….connected.
Another company slated for the ‘80’ portion of the 80/20 portfolio that piggybacks on Biden’s bill that I own is Brookfield Asset Management. These are some of the best capital allocators in history.
They own things like ports, railways, highways, and the guts of the system around infrastructure. Exactly where the capital is flowing. Plus they pay a nice little dividend kicker.
What I’m watching — but sitting on the sidelines for now — are companies like Plug Power, Chargepoint, Stem Inc., and Blink Charging. These companies all relate to charging and the infrastructure surrounding renewables. Although I’m very bullish on the future of these systems, some of the hype was overblown.
Another debate (which could be a whole issue on its own) is that although I am a HUGE fan of Elon Musk and I believe he is a true step-function innovator, I must admit I missed the investment and can’t get my head around the valuation at the moment. More on this here.
Looking at EVs, even if you assume EVs will reach 50% of new annual sales and a 35% increase in fuel efficiency in new internal combustion engine (ICE) car models, this would only result in a 20% reduction in transport emission by 2030 because of the existing inventory of ICE cars.
So lots of work to do here from the perspective of cutting emissions, and I think the incumbent car manufacturers (Ford, GM, etc…) will also play a huge part.
In any hype cycle, the real ones shake out and persist so these are the types of names you add to a watchlist, get a starter position and add on pullbacks.
Speaking of where we are in the cycle of this Clean Energy theme, it ran up huge into the beginning of 2021 (see chart above of one of the largest Clean ETFs in the world) It has since pulled back +30%.
My picks from when I first wrote about this theme Nov 27th 2020 are up on average +20%, while the ETF is flattish.
Wrapping up…
It used to be the case that a lot of renewable energy companies were more like interesting science projects.
Energy consumption was dominated by fossil fuels because it just made sense on a unit economic basis. But if you look at the levelized cost of energy, renewables are now much more viable… and finally exciting!
The future is…wait for it… looking… sunnier.
I would also rather not piss off Bill Nye the Science guy.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S Bitcoin’s cousin Ethereum and cute pet Dogecoin hit record highs this week… One is freaking out the American Banks and the other has the SEC foaming at the mouth. What a time to be alive ; )
Government says "1-3%” inflation…I say “3-5%”…
So, how am I protecting my hard earned money? Watch HERE!
What else we Grittin’ On?
Dr. Copper. The metal in your home, iPhone & Tesla — hit a record high. Demand strong and supply getting hurt by copper rich countries like Chile introducing punitive taxes.
SEC Short Shorts. GameStop & Archegos incident have the SEC considering making big investors disclose more on short & derivative positions. ‘Only when the tide goes out do you discover who's been swimming naked.” – Buffett
Shipping Surge. Suez incident plus surging demand has depleted capacity…. Crazy expensive to ship stuff out of Asia!
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