What makes you want to buy solar stocks – guilt or greed? Lucas White, who picks those stocks at Grantham, Mayo, Van Otterloo, could justify his portfolio either way. But it was more the payoff on energy that got him started.
Six years ago GMO assigned White to help run its natural resources portfolio. There’s no way to operate such a portfolio without a hefty exposure to energy. And that got White thinking about the financial hazards embedded in oil and gas wells.
“All the risks I saw over the short to medium term you can diversify away from,” he says. “But not the long-term risk, the stranded-asset risk. Carbon regulation could mean that your coal, tar sands and heavy oil can never be developed. Technological disruption could render your assets useless.”
Solution: Put some of your energy money with the anti-oil crowd. Own solar and wind companies.
Alongside a well-diversified allocation to fossilized-energy companies like Royal Dutch Shell, Statoil and Chesapeake Energy, the GMO Resources Fund has money in companies like First Solar, which makes photovoltaic panels; Sociedad Química y Minera, which mines lithium; and Iberdrola, a Spanish utility that gets a third of its electricity from renewable sources.
But there are only so many investors who want their clean stocks mixed in with the dirty ones. So this year GMO created an offshoot of its resources fund: a pure play on green called the GMO Climate Change Fund. With alternative-energy stocks, White says, you can get all the exposure you need to crude oil prices without touching carbon. When oil goes up, it takes oil substitutes with it. Of course it takes them down, too. The collapse in oil three years ago did a lot of damage to alt-en shares.
The thinking behind the two funds for which White is lead manager comes from Jeremy Grantham, the 79-year-old cofounder and chief investment strategist of GMO. Grantham is a strange mix. He is a hard-nosed value investor who, refusing to get swept up in Wall Street’s periodic episodes of irrational exuberance, sees clients walk out the door during bull markets. (At $74 billion, GMO’s assets under management are half what they once were.) He is also a passionate environmentalist, devoting time and money to saving the planet.
The resources fund follows an environmental theme, a bet on costly energy and scarce minerals. The climate fund fits right in. It will be of interest to any endowment manager who’s under pressure to divest oil and gas companies.
White, 43, is a younger version of Grantham, combining portfolios with ecology. He commutes to his Boston office by foot and train. He is a follower of environmental hellfire preacher Bill McKibben. He predicts a sea-level rise of 6 to 10 feet if carbon is oxidized with abandon.
But White is not an irrationally exuberant greenie. He dismisses the notion, famously promoted by Stanford professor Mark Jacobson, that the U.S. could run entirely on renewable energy by 2050. He’s not going to buy an electric car until the economics are more compelling. And he isn’t willing to pay more for a company just because it’s virtuous; his portfolio trades, according to Morningstar, at a cheap 14 times projected earnings.
How does White contend with the risks in alternative energy, as great, perhaps, as the risk that Shell will wind up with stranded assets? One is the risk of a shift in public policy. Germany is experiencing a backlash against a renewables crusade that has consumers paying triple U.S. prices for electricity. The House tax plan would chop subsidies for windmills and electric cars. White’s answer: The political risk is going away as the costs of wind and solar power come down. Despite their squawking about the tax bill, producers of renewable power have almost outgrown their need for subsidies.
Another hazard on the road to carbon independence: the not yet solved problem of storing electricity from intermittent sources. Not far from where White grew up near Albany, New York, is a system that stores energy in the form of 20 million tons of water pumped up a hill. It would be nice to have such storage depots in the Midwest, where the wind blows hard but unreliably. Alas, Kansas does not have New York’s hills.
Lithium batteries to the rescue? Maybe. They’re expensive. A collection of Tesla Powerwalls that could duplicate that upstate New York pond would run you $4.8 billion. White says the cost of storage will come down, too, enough so that renewably sourced electricity will cost, without help from subsidies and with storage included, less than a nickel per kilowatt-hour. Give this trend a little time and the utilities will be switching away from carbon without any political pressure.
Next item on our worrywart list: some breakthrough in solar or fusion that makes existing investments as irrelevant as Blockbuster in a Netflix era. White downplays this one. “The risk of disruptive technology doesn’t eat me up at night,” he says. “The risks I worry about are the risks with any company: You buy at the wrong price. You pay for growth that does not come through. Competitors drive down margins.”
Erosion of profit margins is just what happened in solar-panel manufacturing, once a darling on Wall Street and then, overnight, nothing but a commodity business. Guggenheim Solar ETF shares are off from $295 a decade ago to $25 now.
You can guard against this kind of financial risk two ways. One way is to seek companies with product lines that are not easily duplicated. It’s easy to set up a solar-panel assembly line. It would be hard to copycat the assembly of a 700-foot-tall turbine of the sort made by Vestas Wind Systems. It would be hard to imitate the circuitry that SolarEdge Technologies sells to make commoditized panels work better.
The other place to find a margin of safety is in the price of a share. Conspicuously absent from the GMO portfolio is Tesla, trading at ten times book and a not meaningful multiple of its negative earnings. The Spanish utility Iberdrola, in contrast, has no visionary talking about rockets and hyperloops. It costs 1.1 times book and 14 times trailing earnings.
White’s climate fund has a $10 million minimum. If that’s out of range, consider one of the retail mutual funds in this sector, but be careful, because irrational exuberance abounds in green energy. Interesting fact: Not counting short-selling and leveraged funds, the worst ten-year performance in the Morningstar universe has been delivered by the Guinness Atkinson Alternative Energy Fund.
Another approach: Create your own stock portfolio. The shopping list above has a fair amount of overlap with GMO Climate Change. But diversify – this is a risky business.
Click here for the full Forbes 2018 Investment Guide.