Dave Gilbert here, Editor of Smart Money.
We talked last time about demand projections for “old” energy (like oil) remaining robust for not just the next few years, but the next couple of decades. That demand will eventually level off and decline as newer, greener sources of energy carry more of the load.
The transformation of the world’s energy supply from old to new is a massive trend that will take decades to play out. And that’s exactly why a long-term megatrend investor like Eric Fry sees opportunities to make money in both old and “new” energy as the transition takes place.
Last issue, we cited oil demand expectations from OPEC, the highly influential cartel of 13 oil-producing nations, mostly in Asia and Africa (with the exception of Venezuela in South America).
This time, we’ll look at a similar report on the new energy side from The Goldman Sachs Group Inc. (GS), one of the top investment banks in the world, which is already pinpointing outperformers in key areas of the green wave.
Those opportunities also happen to line up almost perfectly with Eric’s…
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Gotta Build the Foundation First
Goldman’s original report focused on “making infrastructure happen.” Specifically, the huge investment required to build this new energy infrastructure and the areas where it is most needed first.
Goldman calls these areas “Greenablers.” As the report points out – thank you very much – that’s a combination of “green” and “enablers.”
The report calls for green energy spending to double from $3.2 trillion a year from 2016-2020 to $6 trillion “needed annually to decarbonize the world, address water needs and shore up transportation and other critical systems.”
The “critical” question is where that money will come from. Here’s what Goldman said in the report…
We estimate that more than a third of incremental Green Capex [capital expenditures] can come from existing publicly traded companies based on their balance sheet and reinvestment spare capacity. Who stands to benefit? We expect equity markets will further reward companies investing in, or exposed to customers’ investments in, Green Capex that delivers favorable corporate returns. We expect rising focus and investor support for the Greenablers (Green Enablers) – sectors where Green Capex is needed more urgently to help alleviate future supply-chain bottlenecks and/or reduce execution risks.
The stock market has rewarded companies with Green Capex and can continue to do so, in our view.
We see equity outperformance from Green Revenue/Capex-exposed companies, corporations that are reinvesting a high/rising percent of cash flow in capex and R&D, and the Greenablers — companies in building blocks sectors (e.g., copper/aluminum, electricity transmission, semiconductors, cybersecurity) where increased reinvestment will be needed more urgently due to project lead times.
Okay, so Goldman is saying the infrastructure needs to be build first, and there are opportunities to make money on the outperformers. Goldman says these Greenablers will come from four sectors critical to clean energy development.
If you follow Eric Fry’s research at all, these will look pretty familiar…
The Four Greenablers
Eric hasn’t used the word “infrastructure” as Goldman did, but he has told his readers that the processes for creating greener technologies aren’t where they need to be. In fact, they are counterproductive. As he wrote in Smart Money back in June…
Unfortunately, the transition to “green” technologies isn’t as green as we might like it to be. Many “sustainable” ones aren’t as environmentally friendly as advertised.
This inconvenient truth hasn’t attracted widespread attention yet – but it will. And this truth will matter in ways that produce significant commercial impacts in the renewable energy marketplace… and significant opportunities for investors.
Now, when it comes to being green, most of us focus on the finished product without paying much attention to the nongreen processes that delivered that product to our door… or to the nongreen aspects of using that product day-to-day… or to the nongreen aspects of that product’s end-of-use disposal.
But any honest evaluation of environmental impacts must include every facet of a product’s life cycle – from the pre-production phase to the disposal phase.
Enter Goldman Sachs’ Greenablers – which, as I mentioned, are going to sound familiar to regular readers.
Copper/Aluminum
In an earlier report, Goldman went so far as to call copper “the new oil” of green metals. Copper plays a “direct role in the production of batteries, renewables and transmission cables. The bank expects demand to increase anywhere from 600% to 900%.
Last year, Eric identified “a battery metal ‘rush’ that would push prices higher for copper, nickel, and other metals that electric technologies require.”
Goldman highlighted on aluminum as “an enabler of clean technologies including solar/wind/EVs.”
Eric recommends both copper and aluminum companies in Fry’s Investment Report. (His copper recommendation has soared more than 170% in the past two years!) Both are leading producers of their respective mentals. Both are down in this year’s volatility, even as their prospects for powerful long-term growth remain intact.
Electricity Transmission
Goldman says transmission of newer energy sources is critical for the expansion of renewable energy. As such, more transmission pipelines need to be built. The report states…
While there is potential for some pipelines currently transporting oil and natural gas to be repurposed should demand and contractual obligations allow, the geographical differences from where solar and wind generation utilization will be the greatest vs. where demand centers are located for electricity should likely drive a significant need for additional electricity transmission.
Eric does not recommend direct electricity transmission companies, though copper plays a key role in that, so he indirectly benefits with his recommendation there. Goldman’s report highlights two energy infrastructure firms: Sempra (SRE) and Public Service Enterprise Group Inc. (PEG).
Semiconductors
Technology is as much a part of energy as ever, and that will only increase in the years ahead. “Solar panels and electric vehicles use semiconductors, automation critical to energy efficiency is driven by semiconductors and the improved computing power has contributed to energy efficiency across the board,” states the Goldman report.
Eric recommends a large semiconductor producer that is entering a new “era of innovation” in terms of its chips, its capacity to make the chips, and its position to benefit from the transition to autonomous vehicles – which can’t function without massive computing power and will be powered by batteries.
Cybersecurity
The shift to high-tech green energy brings with it greater automation. Unfortunately, greater automation brings with it a greater risk of cyberattacks. Goldman writes that “cybersecurity will be needed to protect investments in infrastructure and water and will be required to prevent attacks and hacks in electric vehicles and other green technologies.”
Cybersecurity is important to a lot more than just energy, and Eric has followed this trend for a couple of years now. In the October issue of Investment Report, he wrote…
That growth trajectory will likely accelerate over the next few years, as cybersecurity becomes an increasingly essential priority for both enterprises and governments.
As the chart below shows, global cybersecurity spending is on track to grow more than 8% per year over the next few years, which would be at least double the rate of global GDB growth.
All of these sectors Goldman Sachs identified and Eric Fry’s recommended stocks are in position to benefit from this shift to new sources of energy. The world developed based on old sources, so it’s impossible to overstate the magnitude of this shift.
Something that big, which will require equally massive amounts of dollars, creates several major “echo booms” in various markets. Investors can expect good opportunities in both the old and the new for some time to come.
Regards,
Dave
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
