June 17, 2021
Since the Save the Planet! movement in the 1990s, when school kids were taught about recycling and the world first heard about our ozone layer and its gaping hole, we’ve heard lots of promises from our government – and the promises still exist today to convert the world to green energy and electric vehicles (“EV”), delivering a lower carbon footprint to the world.
As I said, we’ve heard promises before… (remember Solyndra?) And as investors, we need to know if they mean it this time around.
Meeting in the United Kingdom last week at the G7 summit, President Joe Biden joined the world’s biggest democratic superpowers in pledging billions to help developing countries fight climate change. They’re offering the money as an alternative to the predatory lending practices that China is pushing in many emerging market countries…
You know the drill, “Here’s a big loan at a great teaser rate.” But when these countries can’t pay the money back (as typically these developing countries – including many on the resource-rich continent of Africa – cannot), China swoops in and takes ownership of valuable assets from ports to commodity mines.
So, wouldn’t it be nice if these countries had an alternative?
That’s partly what’s motivating the G7 pledge, in addition to the G7’s overall commitment to green energy – an initiative backed by the world’s largest asset manager, BlackRock, as I explained in an earlier column.
Whether or not you agree with the climate-change movement is irrelevant as an investor. The reality is the so-called “cool kids” – from Justin Trudeau, Emmanuel Macron, and Angela Merkel… to Mario Draghi and Yoshihide Suga… to Prime Minister Boris Johnson and President Biden – have designated this as their project du jour. And you want to be poised to benefit from the increased investments in the sector.
On the plus side for green-energy investors, I would expect that policy, if properly pursued, may have a tremendous effect on consumer and businesses’ behavior. You have only to look at the energy policy in Brazil to see how that works.
A Brazilian Case Study
In 2006, just as the Bush administration was hoping to make the U.S. energy independent, I traveled to Brazil for a look at the one country outside the Middle East that was already doing this successfully thanks to its huge investment in sugar-cane ethanol.
Brazil had proudly just announced that it had become self-sufficient in energy – something the Bush administration was setting as a goal for the U.S. (We did make this happen thanks to fracking operations in Texas and Oklahoma in subsequent years.)
The initiative to wean Brazil off of OPEC-controlled oil began in the 1970s. Government officials explained to me that as they faced escalating oil prices and limited supply, the county sought an alternative to oil. They found it in sugar cane, discovering the ethanol product was relatively inexpensive to produce and burned more quickly and efficiently than oil. And Brazil had plenty of sugar cane…
Brazil’s government made a massive investment into the research and production of sugar cane to power its vehicles instead of oil. The country had incentives to car manufactures to offer the ethanol option, and it mandated that every gas station in the country have at least one ethanol pump.
The rest was up to the consumer… And sure enough, Brazilians weren’t stupid… The sugar cane fuel was a lot cheaper than gasoline – so people began migrating to that instead. And within roughly three decades, the country declared itself energy independent.
There’s no reason why the U.S. and the G7 couldn’t employ similar tactics, and judging by recent rhetoric, it sounds like they will.
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How to Play It
So the green wave is here… Does this mean selling your oil holdings overnight in favor of green-energy plays?
Not exactly… In fact, as I explained last week, I anticipate that as the economy improves and oil moves higher (likely between $75 to $100 a barrel as early as this summer), the Biden administration’s suppression of drilling and increased red tape around traditional energy will make drillers that much more valuable.
But I also like the green-energy investment play. In August of 2020 and repeatedly until January of 2021 (when, in my view, the company became too expensive), I explained to my podcast listeners that I liked Tesla regardless of who won the election – in part because the company was a bet on a good economic policy environment if Donald Trump won, and a bet on green energy if Biden won.
Speaking of Tesla, it’s worth looking into the companies that will literally power the EV movement, because it’s often these overlooked ancillary businesses that can offer promising returns.
EV battery makers are expected to see more upside in the coming years as these vehicles increase in popularity and thus face greater demand.
Investment banking company UBS highlighted three EV battery companies that it liked this past spring, including Korean battery maker LG Chemical, as well as two Chinese plays –Yunnan Energy New Materials and Contemporary Amperex Technology.
To be honest, I’m hesitant to invest in the Chinese energy plays. First, China’s track record for production is not always to be desired, as it has a history of selling dangerous products to U.S. consumers. Just in recent years, China has sent us toothpaste laced with the poisonous chemical diethylene glycol and half a million toy cars coated in lead paint. Let’s just say I’m not counting on a car battery that’s “Made in China.”
If the U.S. is smart, it will put its capital and attention behind U.S. companies focused in this sector. So I’m on a quest to find the most promising U.S. companies that can conquer this market in the future…
Silicon Valley-based Sila Nanotechnologies (started by Gene Berdichevsky, who helped develop Tesla’s battery) is still a private company but may come on the public market in the coming years. It recently received more than a half-billion dollars in Wall Street funding… again another sign of how committed the current investing environment is to this venture.
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Romeo Power (RMO) is another U.S.-based company out of California that makes EV batteries. It recently went public and is trading at a price-to-earnings (P/E) ratio of about 22. A relatively high P/E ratio means a stock is expensive, and a low P/E can signal an undervalued opportunity. Currently, the tech-heavy NASDAQ 100 Index is trading at a P/E greater than 38 times… so Romeo is low compared with other tech firms.
Romeo’s lithium-ion batteries are the cutting edge of today’s technology in EVs, particularly in the commercial space. While revenues were only $9 million dollars in 2020, the company has more than $500 million in contracted revenues from customers. Management is expecting revenues to more than double in 2021.
With its special purpose acquisition corporation (“SPAC”) merger late last year, Romeo received a $394 million injection of cash to help fund research and development and growth of operations. Like most Silicon Valley start-ups, Romeo has been very reluctant to take on much debt and has relied on equity funding for its growth. The company currently holds enough in short-term investments to pay for all its liabilities nearly 8 times over. The balance sheet is very strong, and as a result, will help fund years of growth as the EV market continues to grow.
Romeo’s stock is down considerably from where it initially debuted, but it’s possible that it could see a breakout if Biden and company prove they’re committed to the U.S. effort to wean ourselves off gas vehicles. I’d watch this company closely…
Meanwhile, in keeping with at least North America, there’s another player in this space that could also be poised for an interesting future – Lithium Americas (LAC), an exploratory lithium mining company with projects in both the United States and Argentina. The company is still pre-revenue and as such represents a riskier play, but the first mine is scheduled to be in production by mid-2022.
The company remains well-capitalized with more than half a billion dollars in cash on the balance sheet but will be slowly draining that cash until the mines are fully running and any real revenues start coming in.
The need for lithium will only increase in tandem with EV adoption, as it represents a crucial part of the construction of the battery. RMO and LAC are still early on in their lifecycles but could see massive growth as the EV market expands.
Of course, keep in mind that all of these companies are dependent on whether or not the Biden/G7 policy really takes off. After all, Barack Obama pushed for EVs, but they never caught on.
Nonetheless, I do believe this time is different…
A real chorus of people wants to see this shift away from gas-guzzling SUVs. If accompanied by policies that effectively encourage the fledgling EV industry, it could be a space that’s here to stay.
For more on the potential investing opportunities in the green energy space and the future of energy diversification, check out this week’s podcast. I sit down with the former head of the U.S. EPA, Andrew Wheeler, who says there’s plenty of opportunity in recycling batteries and solar companies. It’s this innovative technology that will ensure a transition toward broader energy sources in our future.
- We’re privy to the environmental repercussions of extracting fossil fuels with fracking, drilling, and mining coal. But we need to give more mind to the impact of producing and disposing of solar panels, wind turbines, and EV batteries.
- In the U.S., our greenhouse gas emissions have gone down steadily since 2005. Still, they’re rising in India and China, bringing us to nature’s truth: pollution doesn’t care about international boundaries.
- It makes no environmental sense to take ourselves off the trough of Middle East oil only to be an energy sector slave to China. They’ll use dirty coal-fired power to provide us “Green-friendly” solar cells or EV batteries in the ultimate cosmic joke.
- Kudos for tweeting out your eco-conscious wokeness Gen Z, but the iPhone you’re posting from uses plenty of raw materials and products from fossil fuels, plastics, and natural gas.
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Publisher, American Consequences
With Editorial Staff
June 17, 2021