These are the sectors I currently focus on for green stock investments:
- Renewable Energy
- Energy Storage
- Smart Grid
- Software Analytics and Environmental Services
Key issues for green investments are that sectors are competitive and exposed to technological and regulatory changes. Despite a lot of growth there are only a handful of winners and industry champions and it makes sense to run a concentrated portfolio for the green space.
You can be quite successful with more diversified growth strategies but they come at a different risk profile. I personally prefer to build the core portfolio around value stocks and add a few small growth positions as addition offering a strong upside.
Key point in this space even more as for every investment is clearly to understand the competitive position/advantage.
One great advantage of green companies is there are a lot of renewable project backed companies out there with cash flows not depending so much on the economic growth but rather on the wind and electricity prices etc. They can offer relatively predicable stable cash flows if you bought at the right price. Here you can actually use the market psychology to buy some of these companies sometimes cheaper than in the private market, often they swing to a lot higher prices in the private market as well. Example for such companies are Yieldcos (listed renewable projects, usually already operating), Independent Power Producers (IPP, mixture of development and operating projects) or some green utilities. I usually prefer IPPs as you can value the existing projects and cash flows which offer you a good downside protection and you can evaluate the development pipeline offering potential upside and higher cash flows in the future.
Overall, the green universe offers a wide range of possible investment styles and risk approaches. It also offers already enough opportunities to play offensive or defensive, depending where we are in the market cycle.
What have been some historical Industry Champions and could they have been identified earlier? My two favourites are Vestas and Orsted.
Vestas was clearly improving its competitive position year over year in a consolidating market and is now in a very strong position. Is Vestas still a buy in 2020? That is a different question. The current valuation is high and you make most of the returns by finding a new industry champion which gets into a better competitive position each year rather than having that already priced in by the market. On average mean reversion often kicks in.
It requires a very detailed analysis. The solar industry is still consolidating and that is probably a good sector to find your new industry champion.
Orsted also improved it competitive situation in the offshore wind sector each year with a very good business model and the share price has more than doubled since the IPO. There is clearly more growth to come in offshore wind and Orsted is in a strong position but it also comes with a high price and lower project IRRs which are currently still supported by low interest rates. The key question is does the current valuation not already factor in perfect execution along that growth path?
Again, in my view there are more rewarding investment returns out there by finding the new industry champions or turnarounds. But could you have identified those investments a few years ago? I believe if you follow the industry you could have.
This leads me to my new topic food.
You cannot call yourself an environmentalist if you are still eating meat. I came to this conclusion after watching the following documentaries (all available on Netflix):
Key reason for a good vegan diet can also be purely selfish. It improves performance and health with a massive impact. I am four weeks in on vegan diet and feel great and notice the performance improvement already. You don’t believe me? Watch this movie first.
Generation Investment Management also covers vegan food as a key sustainable trend:
It’s simple, the vegan diet is the one thing everyone can do which has a massive environmental impact today.
As a conclusion, I want to include vegan food production or meat alternatives into the green investment universe. But I am afraid there are not a lot of listed vegan investment opportunities available.
Of course, one company that comes to mind is Beyond Meat. I like the products and support the company but is it an investment right now? It’s clearly a no from a valuation point of view. I don’t understand how they could achieve such a high IPO valuation. Plus, growth alone is not good enough as competition kicks in. Again, competition here is also a key topic. You have the Impossible Foods now with their Burger King deal, plus Tyson Food and others wanting to go into the space. Furthermore, various discounters starting to develop their own products.
This is definitely not a space for value investments at the moment but worth watching. Maybe at the right price we can make a small growth investment in this sector. Unfortunately, the more likely scenario is that we will also see the future brands getting acquired by larger food conglomerates out there. Such as Alpro got bought by Danone.
Maybe we are lucky and at some point, find some good vegan stocks. At the moment I have not come across anything. Please let me know if you know any vegan investments and please spread the word about the movies.