Hello Everyone,
I filled the tank of my SUV recently as gas prices hit an all-time high in the city of Vancouver, Canada. While our province’s oil tycoon neighbours in Alberta are likely enjoying the oil boom, here on the west coast, paying $2/litre (about $184.33 a tank fill to be exact) is not so fun.
The impact of rising energy costs goes beyond the pump, so get ready for some unexpected price hikes.
Even retail investors beloved CEO Elon Musk, has bumped the price of a new Tesla twice in this past month alone.
While rising costs can justify higher prices for companies, it’s mostly about who can get away with it. The math on buying an electric vehicle is getting more compelling by the day, so what better time to boost revenue?
It goes without saying that rising energy prices will benefit the oil patch (in the short term anyways), but over the longer term I think there is an even more compelling theme for investors to explore.
In this article we’re going to dig into three factors that should provide a catalyst for renewable energy stocks to breakout, while discussing how I’ve positioned my portfolio for this long term investing trend.
Technology advances have made renewable energy more competitive
According to Bloomberg, the costs of solar and wind power have dropped 85% and 49% respectively from a decade ago. Building new wind or solar capacity now costs less than adding the equivalent in coal or gas plants in two-thirds of the world.
A decade ago, solar panels on residential homes were only for die hard high income granola munchers, whereas now the economics could see panels start to pop up on homes everywhere.
No matter how much the general population cares about the environment, wide spread mass adoption has to start with good economics, and it looks like we’re right there.
In spite of a recent jump in costs due to key commodity prices rising such as Lithium, Nickel and Copper, battery costs and efficiency are expected to continue to improve over time.
Lithium-ion battery pack prices, which were above $1,200/kilowatt-hour in 2010, have fallen 89% in real terms to $132/kWh in 2021. Bloomberg has even predicted average prices will dip below $100/kWh in 2024.
Because the sun doesn’t always shine and the wind doesn’t always blow, energy storage is either going to be the key for mass adoption, or the limiting factor (please someone pitch me a stock).
It’s something to keep a very close eye on, but the trajectory looks promising.
Clean tech investments have reached an all-time high
As an investor, being correct but early is as good as being wrong, which is why it’s always risky being the first to put your chips in on a new sector.
Leading up to the 2008 financial crisis, billions of dollars poured into renewable energy companies, only to completely flop as portfolio companies weren’t able to live up to corporate pledges.
Fast forward more than a decade, in 2021 climate tech companies raised $165B from global public equity markets and private investors.
Two-thirds of this funding came from public markets, including Reddit crazed SPAC reverse mergers.
The trend is your friend, and I would always rather surf the wave than swim upstream.
Beyond equity investments, money being put directly into projects has hit an astonishing level.
In 2021, global investment in the “low carbon energy transition” totalled $755B, up from $595B in 2020 and just $264B in 2011. This figure includes investment in projects, such as renewables, storage, charging infrastructure, hydrogen production, nuclear, recycling and CCS projects – as well as end-user purchases of low-carbon energy devises, such as small-scale solar systems, heat pumps and zero emission vehicles.
Most notable in my view, is that the largest sector in 2021 was renewable energy, which attracted $366B for new projects and small-scale systems.
There is an enormous amount of capital pouring into the sector, and the recent events transpiring in Ukraine are likely going to contribute to the momentum.
Energy independence is a renewed priority
As of late 2021, the U.S. was importing 8.5 million barrels per day of crude oil and finished products, of which 595 thousand barrels came from Russia (7% of total).
Joe Biden recently announced that Russian oil will be banned from purchase by the U.S., and as a net exporter of oil, the U.S. has that luxury. Immediate beneficiaries are likely “local” producers up in America’s hat (Canada), but longer term there’s a clear shift underway.
Of Joe Biden’s $1.75T “Build Back Better” budget, in addition to being heavy on alliteration, it’s also loaded with climate change initiatives. President Biden believes he can get at least the $555B earmarked for climate change approved.
For context, I’ll quote my own paragraph above once again:
“the largest sector in 2021 was renewable energy, which attracted $366B for new projects and small-scale systems”
That’s 50% more than the global record level spent last year!
Now Europe on the other hand, who is extraordinarily dependent on Russian oil, doesn’t have the option to turn off Putin’s taps overnight.
The best they can do is push forward with a longer term plan to reduce their dependence.
The International Energy Agency (IEA) this month issued a 10-point plan to reduce Russian gas imports by 63 billion cubic meters, approximately half of what Europe imported last year.
A few days after the IEA’s statement, the European Commission announced an even more ambitious plan to reduce reliance on Russian gas by two-thirds before Christmas, and abolish all Russian fossil fuels – including coal and oil – by 2030.
Shifting to green energy is fundamental to the European Union’s climate plans, and Russia’s invasion of Ukraine compelled the bloc to speed up its timetable for adding wind and solar power to help substitute for Russian supplies by 2027.
How am I positioning my portfolio?
Though renewable energy stocks are a long term investment theme which will inevitably have further bumps on the road, I’m moving my portfolio to make a few near term moves.
The first of which was to remove my remaining exposure to oil while the hype is still alive and well.
Though I do see short and medium term gains from traditional energy stocks, any de-escalation of EU conflict or an agreement from OPEC could likely pull prices back down.
I have sold the rest of my position in Reconnaissance Energy Africa (RECO.V), which I’ve held for over a year (an eternity in the small cap game).
My average purchase price was $4 when I sent out my research to this email list, and my average sale price was just above $6, clocking in a nice 50% gain in my Tax Free Savings Account (TSFA).
The longer term implication of this energy price shock, in my opinion, is a renewed focus on local renewable energy production, with much of the focus on wind and solar.
Looking at two ETFs that offer broad exposure is First Trust Global Wind Energy ETF (FAN) and Invesco Solar ETF (TAN).
Not only did these ETFs nail it on their ticker selection, but over the last month both have performed incredibly well!
FAN is +6.4% and TAN is +13.7%
My first ever exposure to renewable energy is through Algonquin Power (AQN.TO), a Canadian renewable energy and regulated utility conglomerate with assets across North America. Algonquin actively invests in hydroelectric, wind and solar power facilities, and utility businesses.
At over a $10B valuation this is anything but a small cap stock, though it’s a reasonable first foot in the door in my opinion.
I am of course actively looking for small cap exposure to the renewable space…
Every promoter on the street is hyping their lithium, copper and nickel exploration companies, though I’ve never been one to find too much passion in early stage exploration.
For now anyways, it’s infrastructure that has caught my attention. I would love to find something related to solar, but the stock on my radar is actually a renewable natural gas company called Evergen (EVGN.V).
TLDR: Starting with food and agricultural waste, Evergen runs these raw “waste” materials through a digestor, resulting in bi-products of biogas (for heat and electricity) and digestate (for fertilizer and soil amendments).
Not only is the gas carbon negative, but it can be fed directly into existing natural gas pipelines without building any new infrastructure.
With a 20 year offtake contract with Fortis, this stock has a long term mega customer built in, plenty of opportunity for further project expansion. Plus, current analyst targets of $10 implies more than a 100% upside potential.
What renewable energy stocks are you holding? Let’s hear it!
This newsletter is written by Kevan Matheson, Founder & CEO of Edge Investments.
Prior to starting Edge, Kevan was an Institutional Analyst at RBC Global Asset Management, one of North America’s largest fund managers, with assets under management in excess of $400 billion.
After spending the majority of his career focused on large market capitalization public companies, Kevan became attracted to the risk/reward proposition of growth stocks and cryptocurrency.
In 2017 Kevan published a book on investing in cryptocurrency, where he speculated on the coming growth in NFT’s and the underlying tokens that power their ecosystems.
Known in the growth stock community as Small Cap Kev, his current passion is finding stocks in disruptive industries like blockchain, psychedelic medicine, plant-based meat alternatives & much more.
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