Despite a recent slump in renewable energy (largely tied to energy prices) the broader cleantech sector has finally graduated from being the dream child of utopian futurists to that of greedy industrialists. Tesla Motors, once the type of investment only Silicon Valley VC firms made its public exit long ago and has become the darling of hedge funds, family offices and the retail crowd. In the time that it’s taken TSLA to carry the Siliocn Valley “Disruption” torch to the doorstep of Detroit, clean energy and energy efficiency flavoured stocks have begun to take up space in portfolios. As cleantech equities try to find a level to rally from, IR Smartt would like to share three main reasons that investors are seeing an opportunity in Clean Tech.
They’re MASSIVELY UNDERVALUED
Renewable energy equities swooned with the oil slump and, for the most part, are showing much lower valuations than this time last year. While the NYSE Cleantech Index is basically flat over the past 52 weeks, bellwether energy stocks like Sunedison and SolarCity haven’t done well over the same period. But the simple idea that the price of fossil fuels going down lowers the cost of energy may well be an oversimplification. For starters, most renewable energy producers sell their energy to the grid, whereas the bulk of fossil fuels are used for transportation needs, so the respective prices of fossil fuels and grid energy overlap only slightly.
Furthermore, in the instances that fossil fuels are used in grids, their price swoon doesn’t figure to be much of an advantage beyond the short term. We wrote last week about how coal and natural gas fired plants aren’t aging well. When faced with having to build a new plant that will be fed with a commodity for which a price fluctuates or one that works off of free sun and wind, long term cost becomes a larger factor. This is what Bloomberg calls “The Capacity Factor’, and it’s driving down the cost of wind and solar considerably.
Charts courtesy the US Department of Energy
If, in fact, the price of energy becomes further detangled from the price of fossil fuels, the recent slump in big-cap renewables could be seen as one of the greatest sector-wide sales in recent history.
Clean-Tech is Marketable & Sometimes Mandated
Investors have to think about capital preservation and returns before developing anything that might be called a moral compass. But consumers aren’t that way. They’ve long been making green choices, and retailers of consumer goods have long been touting the sustainability of their products to move more of them. In many cases environmental efficiency is a matter of law and end runs around it can be damaging – just ask Volkswagen.
The consumer appeal of cleantech has two significances through an investment lens. Any kind of clean tech company that has a way to sell directly to the consumer can consider their equity a premium product. Tesla Motors has only taken a few years to totally change the way automobiles are sold in America. Buyers are eager to pay a premium price for a high end zero emission car with a diminished range (compared to its gas contemporaries), and are happy to wait for it. They line up for new models like they’re Apple products.
Secondly, the same green fever that sells Teslas and home solar units so efficiently has the potential to form a fine third phase of a bull market once the retail crowd starts legging into cleantech stocks. Granted, a price runaway has to get started before the cleantech index start carving out new highs and pundits start talking about a boom or a bubble. But once that inflation gets going, the size breadth and excitement of retail investors that make up the final overvaluation phase, where the early entries make their tidy exit, is staged and ready to go. A retail population who is ready to pay to produce less carbon, will be more than happy to chase a market running away on money made from it.
Burgeoning Sector & An Unknown Growth Limit
The larger cost problems in the renewable resource sector are just now being solved. As we move into a carbon-free future the companies that service the renewable resources are in a unique position. More efficient wind turbines, power delivery systems that cut down on line loss, smart grid software, biomass power generation and a long list of other parts in the global energy and material machine are all still improving and finding their places. A culture of innovation and improvement will one day lead to the solution to problems that are holding the sector back, like battery capacity and intermittency.
There are also solutions to problems that will increase the breadth of the renewables sector, like ways to increase energy density and improve scalability of solutions that are implemented. It’s likely that, much like computer tech, the solutions and innovations that take cleantech to the next level will be sparked in labs at universities and rolled out to the investment community as early stage ventures. They could also be spun out of the advanced lab divisions of larger companies like GE, Lockheed Martin or Siemens. As solutions become apparent and become implemented, there is potential for rapid sector-wide growth in much the same way storage capacity improvements affected the computer tech sector, and diesel locomotives affected the rail system.
Investors Are Scouting Cleantech Companies Now
Attractive valuations bring out smart investors. The buy side and sell side are both going through indexes, reading pitch decks and trying to understand cleantech companies right now. We’re seeing it in our investor surveillance efforts, we’re seeing it on social media and we’re seeing it in the web traffic of our clients. If you’re looking to get more traction with investors who are looking for exposure to cleantech, book a free consultation with one of our IR Smartt experts.