By Matt McCallApr 26, 2017
Energy is a huge part of our lives and our world. As a result, it’s a huge part of Wall Street, too, from its allocation in portfolios to its prominent weighting in the Dow and S&P 500. Just consider the impact oil price fluctuations has on daily market swings.
And yet, it’s not a sector that often gets people excited about the future, largely because the world moves slowly when it comes to energy. Investors have been burned many times through the years trying to get rich off of the next energy breakthrough. Unfortunately, alternatives to the old gritty fossil fuels have been largely thwarted over the last two decades, and oil remains the number one source of energy around the globe.
But it’s time to forget about the companies Wall Street owns, like ExxonMobil (XOM) and Chevron (CVX) and all the other big oil names you hear about on a daily basis. The next generation of energy profits won’t come from them. They’re not going anywhere, but they’re not going to make you rich either. And big profits aren’t ready yet to come from wind, hydro and the other alternative sources that haven’t been fully developed yet (although their time will come).
To invest in next-gen energy now, we need a new approach. We need to look at the niche sectors that are already making attractive inroads while Old Wall Street is still looking in the rearview mirror. In this report, I’ll share the five sub-trends of the new wave of energy and my top picks within each. Let’s start with one that should blow your socks off.
If there’s one thing you take away from this report, I hope it’s this – lithium to me is one of the absolute best investment opportunities over the next decade.
As I’ve talked about, my investing approach looks at the big picture of where the world is and, more importantly, where it will be 10-20 years from now. Think about when the first cell phone was released. Investors who believed the clunky contraption would soon number in the billions around the world are now filthy rich.
A similar situation is setting up for lithium as Wall Street is overlooking the way energy is stored and will be stored in the future. Specifically, the demand for lithium in the use of electric vehicles (EV) is set to soar. Economics 101 tells us that when demand outweighs supply, prices move higher, and that’s the long-term future for lithium.
The EV and energy storage markets currently contribute less than 20% of lithium demand. However, strong growth backed by 14 new lithium ion battery mega-factories has the promise to create a huge market here. Global lithium ion battery production is forecast to grow by an unbelievable 521% between 2016 and 2020. If that’s not a next-gen theme, I don’t know what is!
If you’re skeptical about electric vehicles breaking into the mainstream market, I understand. In 2015, 71,000 battery electric vehicles (BEV) were sold in the United States, making up just 0.4% of all auto sales. But again, here’s where taking the long-term outlook on a trend gives us an advantage. By 2040, it is estimated that 35% of cars sold will be BEVs, putting sales close to 40 million.
As a result, the amount of energy pulled from the grid will skyrocket. According to Bloomberg New Energy Finance, BEVs will pull more than 1,900 terawatt-hours (TWh) from the grid each year. To put that in perspective, that’s enough energy to power the entire United States for 160 days.
I hope this illustrates the huge potential within this theme, and why now is a good time to position ourselves in the sector’s most dominant players. One name that stands out to me is Chemical & Mining Company of Chile (SQM). Chile is a major player in the lithium game, with estimates showing that a fifth of global supply comes from this country. SQM is a well-known player in this space as the second-largest lithium producer in the world, making up about 22% of total production, and stands to benefit from the increasing need for rechargeable lithium-ion batteries.
Albemarle (ALB) is another stock on my radar. The company became the world’s largest lithium supplier in the world after it acquired Rockwood Holdings in 2016, with Bloomberg estimating its global share at about 35%. That’s some serious standing over the competition, and its strong historic EPS growth rate make this industry leader an attractive pick.
The United States has gone from a non-factor in oil and gas production 15 years ago to a world leader in crude oil refining and the largest producer of oil and natural gas. That in itself is revolutionary as the U.S.’ position will only continue to grow and create new opportunities.
But we want to dig deeper to find the real money-making opportunities. Oil may not be next gen, but how we get it is.
Miners realized there was still oil left in the depths of their wells, and wanted a better way to get every last drop out of them. Hydraulic fracturing – or fracking – was then developed as a method of injecting a high-pressure sand mixture into shale rock and causing the oil to flow out to the top of the well.
Fracking became popular a few years ago and it made a lot of people a lot of money along the way. It then fell off with the drop in oil prices, but I’m here to tell you that it’s back – and in a big way. Not just because our administration is pouring money into this field, but because the way we’re getting oil out of the ground continues to improve.
Take a look at the graph below:
As you can see, fracking has become so popular that it has overtaken conventional means of oil production. If you’re the old Wall Street, you probably just look at the stodgy old drillers, refiners and producers. I’m taking a different approach. For my money, I’m going with the company that supplies the sand used in fracking. Think back to the gold rush – you don’t want to pay the miners themselves, but the pick and axe suppliers that make it all happen!
As more U.S. oil and natural gas producers build new rigs, demand for sand only continues to grow and Hi-Crush Partners (HCLP) is there to fill the need. As the second-largest sand company in the United States, this stock is one of my favorite ways to play the energy revolution. I’m also a fan of U.S. Silica Holdings (SLCA), which produces whole grain commercial silica products used as fracturing sand. This is another industry-leading company that is aiming to turn rising sand volumes into profits.
The sand compound used in fracking requires water, and while that may not sound like a big deal, the fact is that water is quickly becoming a scarce commodity.
The world’s water usage has long been a source of concern. For decades, people have been using fresh water faster than nature can replace it. This has contributed to hunger, disease, conflict and migration in some regions. It’s scary to think about, but two-thirds of humanity currently live in zones that experience water scarcity at least one month a year. Last year, the World Economic Forum’s annual survey of opinion leaders identified water crises as the top global risk over the next decade, so this is clearly a serious problem that will need to be addressed in the coming years.
As more attention is brought to water scarcity and its value to new energy developments, innovative investment opportunities are rising to the surface. One company I like is Xylem (XYL), a manufacturer of water and wastewater solutions that works with natural gas and utility companies. The stock has been a favorite of mine since President Trump was elected and as the infrastructure spending deal comes closer to fruition, the stock should continue to benefit.
In addition to finding new ways to harness energy, there is also a focus within the sector to make it better for the environment. As more countries look to a cleaner burning fuel, natural gas will be a major player in the years ahead. But as with fracking, the next-gen opportunity here lies not within the energy itself but in how it is transported.
The United States boasts an abundance of natural gas, but as it has long been transported using pipelines, companies’ export options have been limited. As a result, producers haven’t been able to tap into the world’s growing thirst for natural gas.
But that all changed with liquefied natural gas (LNG), which converts natural gas to a liquid state that takes up 1/600th the volume. With a much easier transport solution in place, the United States became a net exporter of natural gas in 2016 for the first time in decades.
The door is now open to continue exporting the country’s wealth of natural gas, and countries as far away as China are now buying LNG from the United States. But since this is still a growing field, the percent transported by LNG carriers versus traditional pipelines remains low. That means significant upside opportunities still await investors who hop on this theme early.
When it comes to LNG, there are the big name, old Wall Street stocks that have exposure to the sector. But that is not the best way to play the trend. I look for the names that have more direct exposure to the LNG boom and will truly benefit from this growing theme.
Cheniere Energy (LNG) is a major player in the space and owns the first LNG terminal that was completed in the United States – the Sabine Pass LNG Terminal in Louisiana. Then there is the opportunity to profit from the companies that transport the LNG, and Golar LNG Limited (GLNG) stands to benefit from increased movement around the globe.
It’s good to have choices, and that’s where the charts can really help us find the best stock to buy at any given moment – and also when it’s time to sell.
I know, I know. I already said alternative energy efforts haven’t been very successful in recent years, but that doesn’t mean they should be ignored entirely. They’re not going away, so we need to stay on top of all our investment options.
President Trump may not be the biggest fan of alternative energy, but other countries around the globe continue to expand. In fact, Saudi Arabia recently announced it will launch a massive campaign of 30 wind and solar projects by 2023 with investments of up to $50 billion. When the endeavor is complete, it will supply 10% of the Kingdom’s energy capacity.
Japan is also expanding its alternative energy efforts. In 2012, just 0.4% of the country’s energy needs were met by solar means. That number jumped to an amazing 3.4% in 2015, and Japan has a goal for 22%-24% of its energy to come from renewable sources by 2030.
One of the most promising themes in alternative energy right now and a high-growth area for investors is indeed solar. It has had its ups and downs (followed by more ups and downs), but the number of solar panel installations this year is estimated to rise over 88%! And the outlook only gets better from there. A report from the Energy Information Administration indicates continued growth in utility-scale solar power capacity, which is projected to average almost 31 gigawatts (GW) at the end of next year – a 44% increase from 2016. Solar is expected to account for 1.4% of the total U.S. utility-scale generation in 2018, and solar PV-installed capacity should triple its current capacity over the next five years. To put that in perspective, projections show that over 18 GW of solar PV capacity – which is nearly 60% of current capacity – will be installed each year by the end of 2022.
While many of these alternative ideas are still developing, I have a couple of names to share with you that are already making waves. Advanced Energy Industries (AEIS) specializes in power conversion and provides products for solar applications. Ormat Technologies (ORA) is also in the energy power business, with a focus on geothermal energy. ORA owns and operates power stations around the world on several continents, and plans to increase revenue outside of the U.S. to up to 50% from the current 70%. They are also looking to diversify their offerings by increasing revenues from non-geothermal technologies, and has started to attract corporate customers with their ability to reduce energy costs and carbon footprint.
I hope this report showed you that opportunities in energy go beyond Big Oil or Tesla (TSLA). The next-generation trends I see developing now are what will fuel this sector higher over the long term. And the best part is, Wall Street isn’t paying much attention to them yet so we have the chance to get in before the rest of the herd.
That’s what it’s all about – escaping the herd mentality and not getting pigeon-holed by the old ways of thinking. Next-gen energy is an exciting way to do just that, and a profitable theme you don’t want to miss out on.
Thanks for reading!
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