High Energy Prices Have Left Green Stocks Behind
Last week, I wrote how America’s “Everything Shortage” was disproportionately affecting energy and basic materials. The timing couldn’t have been better: prices of oil topped $80 the following day.
Some companies are reaping the rewards. The average sub-$5 oil stock has risen 126% this year, outperforming the Russell 2000 index of small companies almost tenfold. When the price of your only product is going up, it’s hard to lose money.
But much like a bad PB&J sandwich, the love hasn’t been spread evenly across the sector. Green energy firms from Plug Power (NASDAQ:PLUG) to FuelCell Energy (NASDAQ:FCEL) have seen shares tumble 8% and 35%, respectively. The average solar firm still generates a -25% operating margin.
That’s why you’ve seen so few green companies featured on Moonshot Investor. Though renewable energy is the world’s future, most of these companies have been bad bets from an investment standpoint…
… until now.
With fossil fuel prices now gushing upward, it’s time to revisit some of these greener picks, especially those that have gotten left behind.
The Cheap End of The Green Revolution
I know you’ve seen this story before:
- Get an email touting the hottest new stock…
- Check the stock’s price, and…
- Realize it’s at $600 because everyone is also buying in.
That’s the problem with clean energy stocks. The median solar stock trades at 78x EV-to-EBITDA (enterprise value to earnings before interest, taxation, depreciation and amortization) six times higher than the average electricity generation firm. And firms that simply list the word “green” in their business description trade for 25% more than the average firm, according to data from Thompson Reuters.
In other words, even if industry profits manage to rise, green investors have already baked in such high expectations that greater returns will be much harder to achieve.
But here’s the rub. High-flying green energy stocks also rely on cheap peers to make things work. Nexans (OTCMKTS:NEXNY), NKT and Prysmian (OTCMKTS:PRYMY) — three undersea cable companies — have seen shares triple due to offshore wind farm demand. And mining companies have reaped a windfall from electric vehicle battery companies.
Now it’s time for some alt-green companies to succeed too.
Bloom Energy (BE)
Battery companies have long tried to bridge the green energy gap for times when the wind doesn’t blow and the sun doesn’t shine. But as energy experts at the Economist noted, “using giant batteries or other storage … is currently impractical at scale.”
And that’s where companies like Bloom Energy (NYSE:BE) come in. By using a consumable fuel, rather than storing it as a battery would, Bloom’s fuel cells require zero recharging. Green-minded consumers will also like knowing that BE’s generators rely on chemical reactions rather than combustion.
That’s what makes Bloom’s fuel cell so attractive to customers like hospitals and manufacturers. For customers that can’t afford power disruptions, long-lived power generators will beat short-term batteries any time.
And the best thing about Bloom? Shares are quite reasonably priced. The company trades at a 3.5 x forward price-to-sales, making it 90% cheaper than high-flying Plug Power and Fuelcell Energy. At $20, Bloom’s shares are a “buy.”
At first glance, the green revolution seemed like the “beginning of the end” for nuclear energy. Japan suspended all nuclear power plants after the 2011 Fukushima Plant accident, and several other countries pledged to follow suit.
But aggressive carbon emission goals have changed the math: nuclear power is back on the table. According to the International Atomic Energy Agency, Japan currently has 33 nuclear reactors back in service. And at last count, there are 51 nuclear power plants under construction in 17 different countries.
One cheap company looks set to ride the nuclear wave higher: Cameco (NYSE:CCJ).
Regular Moonshot readers might remember that I’ve written about Cameco before. CCJ owns two of the world’s most productive uranium mines in the world, making them much like the OPEC (Organization of the Petroleum Exporting Countries) of nuclear energy.
And with prices of fossil fuels reaching record highs (and carbon emission goals starting to creep up), it’s no surprise that CCJ stock has seen newfound interest.
Rival Uranium Energy Corp (NYSEAMERICAN:UEC) is a similarly strong short-term bet on rising energy prices; that holding company has more than $100 million of uranium in its inventory. But for those seeking a company with a steadier stream of income, Cameco is hard to beat.
Flower Turbines (Crowdfunded)
Finally there’s wind energy, a technology that’s beginning to mature into a cost-competitive energy source.
One of the most interesting players in the field is Flower Turbines, a creator of micro-sized wind turbines (though the term “micro” is relative; their turbines stand anywhere from 1 meter to 6 meters high).
Today, the typical wind turbine rotor stands over 400 feet in diameter — taller than the Statue of Liberty. These large rotors are more efficient than smaller ones, but many critics find them unsightly and worry about the threat posed to winged wildlife.
Meanwhile, Flower Turbines’ rotors look more like elongated tulips — easy for birds to see and avoid. It’s an ideal counterbalance to the ever-growing size of commercial windmills.
Skeptics might point out that the company’s power-to-land ratio isn’t particularly high. And it’s true: an acre of traditional wind turbines already produces ten times less power than an acre of solar panels. Flower Turbines will do even worse.
But such comparisons miss the point. The defining number for any energy source is its comparative return on investment (ROI) — land use is just one piece of that puzzle. When was the last time you heard anyone worry about how much land oil sands drilling or nuclear waste disposal consumes?
As a crowdfunded company, Flower Turbines also comes relatively cheap; its $61.7 million valuation is just a fraction of many zero-revenue SPAC (special-purpose acquisition company) listings. If the company can reduce its fiberglass costs at scale, the firm’s micro-windmills could provide the competitive edge it needs.
Investors can invest via StartEngine here.
Bottom line: as energy prices increase, investors are starting to see deals in alt-energy companies.
Solar Stocks Continue to Struggle
Last November, I wrote how “accounting misdirection” could send solar company Array Technologies (NASDAQ:ARRY) down 50%. Fast forward eleven months, and the stock has rightly collapsed. It turns out you can only burnish your income statement with one-time gains… well… once.
It’s not the only solar company feeling the pain though. Invesco’s Solar ETF (NYSEARCA:TAN) has dropped from $119 at the start of the year to $85 today, a 28% loss.
Some investors have blamed rising interest rates for the lackluster performance. Solar panels have large upfront costs followed by 20 to 30 years of cost-free production, so their values will fluctuate similarly to coupon-paying bonds.
Other investors have pointed to continuing competition out of China. The average cost per watt of solar power has declined 90% in the past decade, driven by cheap imports of PV cells.
But the key reason is deflating expectations.
Last year, Congress extended the federal solar tax credit with a catch: the credit would decrease from 30% to 26% this year, and then to 22% by 2023.
Markets have responded in kind. Residential installations increased only 2% in Q2 2021 and forecasted volumes are lower than what’s required to meet President Joe Biden’s climate goals, according to the Solar Energy Industries Association (SEIA).
Though solar could still have a bright future ahead, prices of the best companies — SolarEdge (NASDAQ:SEDG) and Enphase Energy (NASDAQ:ENPH) — still trade at prices that make them mediocre Moonshot investments.
Bottom line: Solar power’s premium prices have translated into low returns. Wait for a better entry point on SEDG and ENPH.
When High Prices Mean Low Returns
In 2000, 3Com spun off Palm Pilot, a maker of popular smartphone precursors.
However there was one tiny problem. Prices rose so quickly that the hot spinoff soon became worth more than its parent company, which still owned most of Palm.
The $23 billion mispricing would eventually remind investors: overvalued companies make poor Moonshots. Palm stock would quickly fall back to earth and eventually be bought by HP (NYSE:HPE) for less than a tenth of its peak price.
Today, green energy companies have created an equally frenzied gold rush. Investors who bought Array Technologies at 7x price-to-sales probably didn’t realize that an accounting quirk was hiding $200 million in lost revenues. The company would go on to lose 70% of its value by June.
As investors look toward a greener future, it’s worthwhile to remember the value of getting in cheap. Because no matter how bright an industry looks, you still need to buy in at the right price.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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