This week’s “Chart for the Curious” follows up on our CFTC from last week and our piece on Andrei Shleifer’s legendary book on Behavioral Finance. In those pieces, we discussed how investors piled into Gold after the GFC implosion, which ended up being precisely the wrong time to do so.
Will Consensus on Electric Vehicles, Solar and Wind Crush Investors?
How similar is cleantech today to 1999? Here’s a quote from CNNMoney published on December 31, 1999[1]:
Wall Street finished the 1900s at an all-time peak Friday — capping a century of unprecedented growth punctuated by two market crashes, the longest-running stock rally in history, and the emergence of technology companies as leaders for the 21st century. …
The market captured the imagination and interest of millions of Americans who participated in some form, either by tracking their own stocks online in the comforts of their homes…
Practically anything with a “dot.com” at the end of its name could expect to see its stock price double, triple or quadruple in a few months, profit or no profit. And investors, eager to cash in, joined the party by the thousands, thanks in large measure to discount brokerage firms, mutual funds and online trading accounts.
Wall Street experts … have become household names.
KCR suggests we are in a nearly identical place today. That article was written before the dot.com crash. So once again, we are at record highs punctuated by two market crashes, and retail investors are “all-in” chasing quick profits. The major difference in our view is that instead of anything with “dot.com,” it is “anything to do with cleantech.”
The Wall Street experts of 1999 have been “replaced” by newly minted super-star fund managers and CEOs. Their investment advice advocates for disruptive technology that is often priced to perfection if at all-profitable. Comments fly around in public that sound almost like a guarantee of future results to our conservative ears.
Is Clean Energy the New “Dot.Com”?
We believe the analogs between “clean tech” and the “dot.com” stocks are painfully obvious. As we will discuss in our piece next Wednesday, we believe this problem is exacerbated by unsustainable corporate leverage.
Is ESG Investing a Good Idea?
Barclays recently released a report ranking the sectors people were most optimistic and pessimistic on. They show investor’s predictions for the best stock market sectors for the “Next 5 years” and “Years 6 and Beyond”.
Source: Barclays
The common theme here is not hard to spot. Investors are extrapolating recent trends. The winners of the last three years are, apparently, just going to keep winning.
The #1 prediction in the Barclays study for both the “Next 5 Years” and “Years 6 and Beyond” is Sustainable Energy. The Technology and Environmental sectors are accorded similarly sunny outlooks. We would like to note that “Sustainable Energy” is not even a GICS sector. Instead, it is a loose collection of clean energy stocks that often includes some of the most speculative and fundamentally weak firms we have seen since the dot.com bubble.
In our piece Oil Stocks to Buy: A Preference for Profits Over Promises, we showed an exhibit contrasting the fundamentals of two clean energy ETFs (PBW & QCLN) with the S&P Energy ETFs (XLE) holdings. The clean energy ETFs held companies that lost money and diluted owners. But, since November of 2018, they are up 300% and 323%, respectively.
The below exhibit shows the stocks from QCLN that have a market cap over $1bn, trade at over 10x price to sales (P/S), are burning cash (negative FCF/EV), and diluting shareholders (negative Total Yield). We have documented the catastrophic financial performance of firms that trade at over 10x and 20x sales.
ESG Stocks to Short?
KCR believes investors are making the same error they ALWAYS have. With cheerleaders on Wall Street bringing deals at a furious rate, investors are excited about what has recently worked. They have forgotten about things like valuations and fundamentals and are extrapolating long-run future returns based on recent history.
Let’s now take a moment and look at where there is the most negativity in the Barclay’s Survey.
We see the same extrapolation phenomenon in their predictions for the worst sectors. Tobacco, Oil & Gas, Mining, and Retail are forever doomed, apparently. For subscribers to KCR, you know that we have been bullish on Energy and Tobacco over the last year. We are emphasizing smoking, eating, drinking, and old-fashioned energy.
“Invest in stocks that earn money, are reasonably priced, and make products or services you need” is our unofficial motto today. Our research has shown that these are also stocks that fare well if interest rates should rise or supply chain problems metastasize into inflation.
Let’s look at the sector that has been the worst performer over the last 3 years that investors expect to continue to perform horribly: energy.
A recent article from Bloomberg noted that Chevron and Exxon generated almost as much free cash flow in the most recent quarter as they did in all of 2019. Both stocks are still LOWER than they were at the end of 2019. Both companies are also paying it all out, and their capex is 40% lower than it was the last time oil was at $80.
Yet Energy is still LESS than 3% of the S&P Index. That means despite exploding free cash flow, these companies have barely budged since we posted:
- This chart showing Energy was at an all-time record low weight in the S&P
- A highlight of Devon Energy’s world-class management, capital discipline, balance sheet, and soaring dividend payments or…
- Our piece, Oil Stocks to Buy, which demonstrated that energy stocks were tracking to massive earnings expansion even if oil sat at $60
The historical research around the folly of investors’ forecasts leads us to believe today’s predictions will prove very wide of the mark.
As expected, the investment management industry is racing to incorporate ESG issues into specialized products to sate demand from investors. None of us here at KCR take issue with the value that the emphasis on environmental, social, and governance issues can bring to the world. And, as documented in our piece on the IEA’s Net Zero report, we are not adverse to the scientific community’s findings in any way.
Quite the contrary. We have highlighted how sustainable investing can be done profitably. We believe those using ESG factors have completely overlooked what Warren Buffett and Charlie Munger have accomplished. We documented the stunning success Berkshire Energy has built using wind energy. What Buffett’s utility may lack in the fanfare associated with many ESG funds, it has made up for in creating massive long-term profits via superb corporate governance and cooperation with state and federal regulators.
We believe investors predisposed towards the facts and fundamentals rather than fads have an opportunity to buy blue-chip companies today at reasonable prices. If you are an institution or RIA, please know we would love to hear from you.
Disclaimer
The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, © are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction.
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