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This is the fifth article in a series of articles covering and summarizing different investment themes/thesis. These themes are usually very powerful and answer for the moves of stocks, entire sectors or even the entire market. The relevance of themes for specific stocks, sectors and even the entire market is explained in the first article in the series (linked below).

The previous articles on this series (by the order they were published) can be found here:

Themes 13-15

This article will be the fifth in a series of articles summarizing themes which are moving specific sectors or markets today. Knowing these themes can help when selecting securities. I'll continue with the following three themes:

  • Global warming;
  • The renewables revolution;
  • The education bubble.

Global warming

Theme

Global warming refers to the view that the recent trend up in temperatures is anthropogenic in nature. That is, it's man-made. This view states that man's emission of certain gases, namely CO2 (carbon dioxide), leads to a greenhouse effect. The end result is significant climate change, increased temperatures and increased sea levels.

While there is still ongoing scientific debate and considerable uncertainty about global warming, the fact is that political decisions are increasingly being informed by it. This can have significant - and much faster - impact than global warming itself. The implications I will talk about concern the consequences of the probable political decisions, not the possible impacts from global warming.

Positive implications

The notion that there can be global warming and that mitigating political actions are needed to combat it is positive for the industries promising lower CO2 emissions. These include industries providing renewable energy, electric vehicles and even lower-emission fossil fuels like natural gas.

An example of the impact of these political measures can be in the zero emission credits which allowed Tesla (TSLA) to show a profit in Q1 2013. Wind energy also usually gets significant tax breaks in many jurisdictions.

Negative implications

The negative effects from the policies trying to mitigate global warming fall mostly upon the companies tied to larger CO2 emissions. This includes the entire coal industry (KOL) as well as coal producers like James River Coal (JRCC), Arch Coal (ACI), Alpha Natural Resources (ANR) and others.

Coal becomes much less competitive when CO2 emissions have to be limited or sequestered. Carbon credits make coal-fired generators become economically less viable. And to add insult to injury, the greater emphasis on renewable energy means greater variability of the energy supply, which also favors natural gas-fired generators over coal-fired generators.

If electric vehicles become much more prevalent, this could also have a negative impact for auto-parts companies - especially those selling powertrain components. Over time, petrochemical companies could also be affected but that's too far in the future right now.

The renewables revolution

Theme

The renewables revolution is tied to global warming, to peak oil, and to a sense that humanity needs to become reliant on energy sources that are renewable and sustainable. This has led to significant investment and promotion of such technologies as wind energy, solar energy, ethanol, etc. Not all are really that appealing economically or energetically presently, but the investment and advancement has been and continues to be significant.

Positive implications

I'd emphasize as most positive the consequences for those companies providing renewable energy or services to producers of such energy where the producers are economically viable or near so without state support. This is something which is close to happening to wind energy producers and might happen in the future even in solar power.

Another interesting effect from renewable energy is that sometimes it's much more variable than conventional generation capacity. Take for instance wind energy, or solar power. It fluctuates, and is not very predictable either. This has at least two large implications:

  • One is that it requires a smarter grid, able to handle the variable loads without compromising reliability;
  • The other is that it greatly promotes the development of energy storage capabilities, both to smooth out the variations, and to take advantage of the cyclicality in the power price - which presently can even reach out into negative pricing. Here, a sector which might end up being favored are the purveyors of fuel cells, commonly used for localized backup power. Fuel cells can be made to both store and deliver power and have significant energy densities, so they can fulfill this task readily. Examples of fuel cell producers getting into the energy storage business include Hydrogenics Corporation (HYGS), Ballard Power Systems (BLDP) and FuelCell Energy (FCEL).

Negative implications

On the negative side, as with global warming and the shale revolution, we find coal. Coal loses from increased alternative generation capacity, especially if favored with "must run" provisions as it might happen to some renewable energy. It also loses from increased variability in load on the grid as it's slower to ramp up. And it also loses if mandates to sequester carbon or carbon credits are created.

Another possible, more diffuse, negative implication has to do with increased power prices resulting from renewable energy mandates. These tend to negatively affect any large power user, and could hit users such as aluminum producers like Alcoa (AA). However, at the same time Alcoa is favored by the shale revolution keeping power prices lower than they would otherwise be.

The education bubble

Theme

The education bubble comes from two different effects:

  • One is the realization that income and employment is proportional to education. A degree thus became a "must-have" in the eyes of the people, both for the younger generation and even for older folk;
  • The other is that through state support and guarantees, it became easy to get an education. This thus makes the education bubble part of the welfare bubble in general.

The charts below illustrate these two points (Source: [1], [2]):

Positive implications

The main beneficiaries of this bubble are the private purveyors of education, including Bridgepoint Education (BPI), Corinthian Colleges (COCO), Apollo Group (APOL), Strayer Education (STRA) and others. However, since this is an unsustainable bubble, these beneficiaries are likely to be hit when the bubble unwinds.

There are two variables which can pop this bubble:

  • The fact that debt is expanding faster than income, so it will be intrinsically unsustainable at some point;
  • And the fact that defaults are already running high and going higher, with the likely consequence of government action to contain them. Regulatory reactions have already happened and are bound to become more and more aggressive, eventually crippling private education in the process.

Negative implications

In this case the negative implications are similar to the positive implications because of what I've said. It's a bubble, as it grows it favors the actors in the space, but when it blows up it affects mostly those same actors.

In a way part of this is already discounted in the very low valuations of many of the actors in the space. For instance, BPI trades at an EV/EBITDA of just 1.3 times. And it runs a massive online business. Were BPI not embroiled in this bubble and facing accreditation troubles and it would easily trade at multiples its present value.

Source: 3 Investment Themes - Global Warming, Renewables And The Education Bubble