By Tom Konrad, Ph.D., CFA

Supply and Demand

One uncomfortable fact for green investors is that the clean energy transition is going to require a lot more mines.  Lithium, nickel, cobalt, copper, manganese, graphite, even steel: just name and industrial commodity, and we’re probably going to need a lot more of it.

Total mineral demand for clean energy technologies by scenario, 2010-2040

Even worse, it’s not at all clear where all these materials are going to come from.  While there are plenty of all the elements we need in the Earth’s crust, actually mining them all in the next 20 years is not something that we can accomplish without paradigm-shifting changes to the mining sector.  It’s difficult to imagine a scenario where we construct enough mines to supply all the materials needed to even reach the world’s stated goals for clean energy development, let alone the scale we would need to keep global warming below 1.5℃ or 2℃.  

Economics 101 tells us that when demand for anything increases much faster than supply, price will also rise until the two can be balanced again through demand destruction (reduced purchases because it’s too expensive) or increases in supply (companies increasing production), usually both.

Investing 101 tells us this is an opportunity for companies that already supply the commodity or can supply the coming future demand are likely to do well, and we should buy them.  The obvious suppliers are existing mining companies. This investing theme was particularly popular two years ago when the expected increase in demand for materials was frequently in the news.  This led to a peak in the S&P/TSX Global Mining Index at 133 in April 2022, which has since fallen to 103 as of February 20 (data from spglobal.com).

Little has changed in the long term bullish outlook for commodities in the last two years since the mining index peaked.  Except the stock prices, that is.  Hence, with the mining index down over 22% at the same time that the broad market has been rising, now seems like an excellent time to invest in companies which seem likely to profit from the coming clean energy minerals boom.

Reduce, Reuse

While I expect that investors in mining companies will do well financially over the next decade, as an environmentally minded investor, mining is one sector I’m simply not willing to invest in.  While I believe that there are likely some mining companies that behave as environmentally responsible as possible, I do not have the skills or the inclination to determine which are which.

Environmentalism 101 (Is that a class?  If not, it should be.) tells us to reduce, reuse, or recycle before we buy something new.  When it comes to these materials, mining is making new.  I expect there are good investing opportunities in all three principles. We can reduce the use of the most expensive and rare materials by substituting more common ones.  Origami Solar (not a public company) is working on replacing expensive aluminum with cheaper and stronger steel in the frames for solar modules, while Form Energy (also not public) is making batteries with cheap and abundant iron instead of the commonly used (and much more expensive) lithium.

We can also reuse existing infrastructure, such as repurposing the sites and grid connections of old coal plants for energy storage. We can also extend and expand the usefulness of power lines with grid-enhancing technologies like better monitoring and software.

Recycle

As astute readers have noted, most of the examples of reduction and reuse of clean energy materials listed above involve new businesses trying to create new markets.  Such opportunities can lead to incredible investment returns, but they also come with a level of risk that I, as a relatively conservative investor, try to avoid.  Recycling, however, is an established business that already produces profits.  This is the type of investment opportunity I look for: Currently profitable businesses that can profit from the transition to a clean energy economy.

Historically, lithium-ion batteries have not been recycled at all due to the lack of facilities to recycle them. That situation is changing rapidly.

The Inflation Reduction Act’s requirement that electric vehicle batteries is leading to a boom in the construction of battery recycling plants in North America.  With all the announcements of new recycling plants, I’ve become concerned that there may not be enough used batteries to go around.  

If I’m right that we are likely to soon have more battery recycling plant capacity than we have used batteries that are easy to recycle, then the companies most likely to make a good profit are the companies that already have systems for gathering used batteries in place.  In the case of used electric vehicle batteries, that means companies that already have vehicle part recycling and reuse facilities, commonly known as junkyards.  Two such companies are Radius Recycling (RDUS – until recently known as Schnitzer Steel) and LKQ Corp (LKQ).  

Radius is vertically integrated, using its junkyards as one source of scrap metal for its recycled steel mills.  It’s also widely recognized as an environmental leader.  Corporate Knights named it the world’s most sustainable company for 2022.  

In contrast, LKQ Corporation is a manufacturer of non-OEM replacement car and RV parts as well as running junkyards.  I don’t think I’ve ever seen LKQ on a list of sustainable companies, although much of its business is inherently sustainable.  Repairing a vehicle is usually a more sustainable option when compared to replacing it.  It’s also what I usually call a “boring” business… I like these because I think they are less prone to selling at inflated earnings multiples.  That’s certainly the case for LKQ today.

My final recycling holding is Umicore SA (UMI.BR, UMICY).  Umicore is a European processor of  recycled battery materials and other precious metals. They are a little farther up the value chain, making them relatively more vulnerable to future spikes in the price of used batteries, but I expect that their established relationships, proprietary recycling expertise, and participation in the more mature European battery recycling industry should help them weather increased competition for a limited supply of used batteries.

Conclusion

It’s widely accepted that the clean energy transition will lead to the demand for many industrial commodities growing faster than supply, although many investors have moved on to other themes since the interest in commodities peaked in 2022.  That makes it a great time to get in.

Investing in mining companies is an obvious, but environmentally problematic way to profit from coming price increases.  Investing in the recycling supply chain may be a less obvious method, but it is much more environmentally sound.  Three stocks to consider are Radius Recycling (RDUS), LKQ Corp. (LKQ), and Umicore (UMI.BR, UMICY). 

DISCLOSURE: As of 2/21/24, Tom Konrad and accounts he manages own the following securities mentioned in this article: RDUC, LKQ, and UMI.BR.  He does not plan to sell any of them in the next two weeks, and may buy more.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  All investments contain risk and may lose value. Past performance is not an indication of future performance. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

ABOUT THE AUTHOR: Tom Konrad, Ph.D., CFA is the Editor of AltEnergyStocks.com (where this article first appeared) and a portfolio manager at Investment Research Partners.

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by Tom Konrad, Ph.D., CFA

Of the few survivors of the dot com bust, Ebay (EBAY) is a perennial also-ran.  It owned the market for consumer-to-consumer (C2C) transactions in 2000, but has since repeatedly lost market share.  Nevertheless, the company remains a profitable business that enables the sustainable reuse of easy to ship items while returning cash to investors.

Note: My supporters on Patreon got an early look at this article.  Want to support my work and get previews of my writing?  Join them here.

The Competition for Sellers

In the early 2000s, Ebay lost sellers to Amazon’s (AMZN) marketplace, which had the advantage of getting listings in front of a larger group of buyers, and has since added more services for sellers, such as delivery services through Amazon’s impressive logistics arm.  More recently, specialist competitors like Etsy (ETSY) for crafts , and PoshMark for fashion have attracted younger users who prefer an app-based interface.

Many sellers prefer Ebay for its lower fees compared Amazon and other competitors, and its pure customer to customer model means that it has no inventory or warehouses, and its operations are not disrupted by trying to maintain social distancing.   Other sellers list on multiple platforms, but offer better prices on Ebay because of the lower transaction fees.

This is why I believe that social distancing is an opportunity for Ebay to claw back some market share from Amazon.  The stories of third party sellers being second class citizens on Amazon’s platform have been prevalent for years, most notably Amazon using its data to directly compete with third party sellers in any category that it starts to see as particularly profitable.  Sellers can succeed quickly through access to Amazon’s legion of buyers on its Marketplace, but if they become too successful, they will likely find themselves competing with Amazon itself.

Sellers discovered another problem with their reliance on Amazon when the company decided to prioritize the delivery of “essential” items in March.  While prioritizing life saving items over toys and knick-knacks is likely a good use of Amazon’s overtaxed warehouse workers, this is small consolation to a small online seller who needs the income to buy their own essential items.  These frustrations will likely lead sellers to be less likely to trust all their eggs to Amazon’s basket.

Looking Forward

Ebay’s revenues, and number of sellers and buyers have been basically flat in recent years, and the company did not expect that to change when it issued its guidance for 2020 at the end of January.  The company did expect single digit earnings per share growth, driven mostly by share repurchases.

Those share repurchases and the new dividend were motivated by activist investors who have forced the company to start returning value to shareholders in the absence of growth.  The company now has a new CEO and two new board members nominated by the activists.  They have also led Ebay to consider the sale of some of its properties, including the very fortuitously timed sale of StubHub for $4.05 billion (approx $5/share) in February.  Further shoring up the balance sheet, Ebay followed this sale by refinancing and extending the term $1 billion of its senior unsecured debt with lower interest notes due in 2030.

Before the crisis, the expectation had been that Ebay would use its strong cash position to invest in its platform, and accelerate its stock buybacks.  The new reality means that Ebay is in a good position to be a consolidator by buying up less well prepared rivals.

Sustainability

For me, “Reduce, Reuse, Recycle” is not just an alliterative list of sustainable actions which I incorporate in my personal life, it’s also a list of investing themes I try to incorporate in my portfolio.  For reduce, I have stocks that incorporate energy efficiency like Hannon Armstrong (HASI) and Ameresco (AMRC).  For recycle, I have Umicore (UMICF, UMICY, UMI.BR), Schnitzer Steel (SCHN), and Greystone Logistics (GLGI).  The essentially anti-consumerist nature of reuse makes it a particularly difficult investing theme to participate in.

I’ve wanted to include Ebay or another C2C marketplace as the first “Reuse” stock in my portfolio for a long time, but until recently, Ebay’s valuation and lack of dividend have kept me away.  The recently initiated dividend and stock decline have changed that.  Combine that now with potential opportunities to claw back market share from Amazon and potentially purchase distressed rivals, and I’m buying.

Or at least I’m selling cash-covered puts on Ebay.  I like to think of buying a stock as a bet that it will go up, or, if it doesn’t, that the dividend will exceed any decline.  Selling a cash-covered put, or buying the stock and selling a covered call are similar strategies that I think of as bets that the stock will not fall permanently.  If the stock falls below the option strike price, the investor will own the stock at a cost below what it was trading at when the bet was made.  If the stock rises, the investor keeps the option premium and cash.

In terms of Ebay’s prospects, the company is cash rich, and its operations are unlikely to be disrupted by the pandemic.  It may even see some upside.  The loss of income for too many people in this crisis will lead some to explore new ways to earn cash.  Selling off unneeded stuff on online platforms is an easy and quick option, especially people who want to avoid in person transactions.

Trading

Good valuation, a strong balance sheet, opportunities arising from people staying at home, and overall sustainability all led me to use a cash covered Ebay put as a new position in my 10 Clean Energy Stocks model portfolio at the start of the month.

The market and Ebay stock fell the following day, and have since recovered, so readers who follow the model portfolio would have had an opportunity to make the trade.  If you missed that window, I expect the market to remain volatile in both directions for months to come as investors sort out what this pandemic and the response to it mean for the economy.

It is that expected volatility that leads me to prefer cash covered puts to the direct purchase of stocks in current market conditions.  If your account does not have sufficient options permission to sell cash covered puts, purchasing the stock and selling a covered call has the exact same risk/reward profile.

If you do not have options permission at all, watching several stocks you think are good prospects and starting with a small position which you increase if the stock falls is probably the best option.  Unfortunately, that strategy is difficult for anyone who does not pay daily attention to the market.

Disclosure: Long HASI, EBAY, UMICF, SCHN.  Small long positions in AMRC and GLGI.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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by Tom Konrad, Ph.D., CFA

On February 21st, I was helping an investment advisor I consult with pick stocks for a new client’s portfolio.  He lamented that there were not enough stocks at good valuations. This is one of the hardest parts of being an investment advisor: a client expects the advisor to build a portfolio of stocks which should do well, but sometimes, especially in late stage bull markets, most stocks are overvalued.  I reminded him, “The Constitution does not guarantee anyone the right to good stock picks.”  He agreed, but he still had to tell his client that the client would be better off mostly in cash, waiting for better values to appear.  I did not envy him the task.  When the client thinks your job is to pick stocks, it’s hard to convey the message that the best course is not to pick anything at all.

After a week of covid-19 fueled stock market panic, I expect he’s having a much easier time persuading his client to wait.  Now the question becomes “How much longer should we wait?”

Calling market bottoms is nearly as difficult as not buying at market peaks.  Right now, the stock market has been falling because investors understand that the covid-19 pandemic is damaging and will continue to damage the economy and company profits.  The extent of that damage remains to be seen, but the consensus seems to be that covid-19 will lead to no economic growth or even a slight decline in the world economy in 2020.  Given that stock prices are highly sensitive to current and future growth prospects, my guesstimate is that the pandemic alone could justify a 10 percent to 20 percent decline in the stock market.

The S&P 500 has already fallen 12 percent.  If my 10% to 20% guesstimate is right, we could have already seen “enough” decline to account for the likely economic damage of the covid-19 pandemic.  Is it time to buy the dip?

I believe it is always wise to hedge one’s bets, and so I have begun to buy a few of the stocks I believe have become better values in the last week (GPP, CIG, SCHN, MIXT). Despite these small buys, my overall stance remains cautious.

The covid-19 pandemic is not happening in a vacuum.  For most of the last year, I have been warning readers that I believe that most stocks are trading at dangerously high valuations.  Until recently, stocks, and especially clean energy stocks, have continued to rise.

Understanding Market Cycles

In general, bull and bear market cycles happen because changes in investor sentiment react to and amplify the effects of business cycles.  When the economy has been good for a long time, not only are company profits high, but the memory of past declines fades for investors, making them less risk averse.  This rising confidence leads them to be willing to accept greater risk for the same potential return, allowing them to buy stocks at higher earnings multiples.  This expansion in earnings multiples allows stock prices to rise faster than earnings for an extended period, and this long term growth is what we call a bull market.

A bear market works in the opposite direction, only faster.  It’s easier to lose confidence than gain it back, so bear markets tend to be shorter and more abrupt than bull markets.  They usually start with some real-world event or catalyst that reminds investors that the economy is not all rainbows and unicorns.  It could be a series of disappointing earnings at big companies, rising interest rates, increasing mortgage defaults, or a health scare.

This catalyst is usually bad for the economy, and the stock market will decline in order to reflect companies’ lower earnings expectations.  This is a market correction, like the 12% decline we had in the last week of March.  Sometimes, that is all that happens: investors realize that the event was a temporary blip, and the long bull market resumes after a brief pause.

In other cases, the catalyst or unexpected event and market correction cause many investors to look around and question their assumptions.  Are there more risks out there that they have been ignoring?

As investors question their assumptions, they become more risk averse, and start to sell their riskiest stocks.  The stock market declines further, as earnings multiples begin to contract.  This decline makes other investors begin to question their own assumptions, and soon the market decline becomes a self fulfilling prophecy.

Covid-19: Correction, or Bear Market?

It is at that critical point between correction and bear market that we find ourselves now.  On Monday, March 2nd, more confident investors rushed in to “buy the dip” after the previous week’s big decline.  Will these optimists outnumber the other investors who are beginning to question their assumptions about risk and stock valuation?  As yet, it is too early to tell.

I do have a guess, however.  My guess is that fear will win, and we are at the beginning of a new bear market.  I think a bear market is likely for two reasons.  First, valuations are historically very high.  A good measure of this is the Shiller Cyclically Adjusted P/E Ratio (CAPE) shown in the chart below:

While the CAPE has not achieved the historic highs seen in the dot-com bubble, it is at approximately the same level it was at the start of the great depression in 1930, and well above its level at the start of the housing crisis in 2008.  From a valuation perspective, if investors do begin to question their valuation assumptions, there is plenty of room for those assumptions to fall.

The second reason I am guessing that this correction will lead to a new bear market is the apparent incompetence and unwillingness of the Trump administration to confront the growing health crisis.  I think the inaction and obfuscation at the highest levels of our government are likely to make the pandemic far worse that it would have been if our political leaders had taken it seriously.

As investors see the disease and the measures taken to combat it begin to affect their daily lives, I think it will also affect their feelings about risk in general.  The fear of catching covid-19 could easily morph into fear of stock market declines.  That fear, if it grows, will set off the viscous cycle of declining stock prices and growing risk aversion that cause bear markets.

Ten Clean Energy Stocks

But I digress.  This article was actually meant to be the monthly update of my Ten Clean Energy Stocks Model Portfolio.

As you can see from the chart, the portfolio as a whole was down slightly for the year at the end of the month (-2.7%) compared to a 2.5% decline of its clean energy income benchmark YLCO and an 11.5% decline for the broad market income benchmark, SDY.  My real money managed portfolio, GGEIP, is barely hanging on to positive territory, up 0.4% for the year to date.

With earnings coming quickly over last week and this, I have a good deal to say about the individual stocks as well as broad market conditions, but I think I will break this update into two parts in order to get the thoughts on the market situation to readers as quickly as possible.

Disclosure: Long PEGI, CVA, GPP. VLEEF, NFYEF, RAMPF, MIXT, CIG, RDEIY, VEOEF, SCHN, Puts on XOP.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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