Climate Change Investing: Up In The Air

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Includes: ABB, BAYRY, BP, DWDP, E, FLR, GE, GSK, INO, MON, MRK, ORA, PFE, RDS.A, RDS.B, SIEGY, SNY, STO, SZEVY, TOT, VEOEY, XON
by: Henry Miles

Summary

Six months ago, I wrote an article suggesting that climate change may represent a generational investment opportunity.

This piece tracks the progress of that idea and discusses changes I have made to my own global warming portfolio.

Results at this point are mixed with water and pharma disappointing, but power and crop reengineering showing some promise.

The Trump administration introduces new variables into the equation that make climate change (and other) investments riskier.

Last July 11th, Seeking Alpha published an article I wrote entitled, "Climate Change: A Generational Investment Opportunity". I began that piece by linking to various other articles tying to the massive body of observations on climate change/global warming; worldwide research done by thousands of scientists, as translated into policy by dozens of countries, and as being acted upon by many more companies and executives. Here is some current news about climate change containing no overlap with the items included in my earlier article:

  • Item: Atmospheric carbon dioxide surpasses 400 ppm.
  • Item: Abnormal weather threatens Norway's Svalbard Islands in the North Atlantic.
  • Item: Climate change probably led to the 70-million-ton ice fall in western Tibet.
  • Item: Another major crack is opening up on the West Antarctic Ice Sheet.
  • Item: Global temperatures continue to set monthly (and annual) records.
  • Item: The Great Barrier Reef may not survive rising sea temperatures.
  • Item: The North Pole warms well above normal; Arctic sea ice levels are at record lows.
  • Item: The fingerprints of climate change are seen in 24 weird weather cases.
  • Item: Global warming data that riled doubters are confirmed.
  • Item: The World Economic Forum places climate change adaptation as top concern.
  • Item: Hundreds of companies urge Trump not to renege on the Paris Climate Agreement.

No Place for Deniers

Various commenters on my initial article rejected the science behind, or basic premise of, climate change including that human beings contribute to it. If someone absolutely does not believe that a challenge exists to be addressed, whatever it involves, then it is illogical to believe that they would invest into it.

This piece is for those who accept as credible wide-reaching evidence that climate change/global warming is upon us and that investment opportunities may result from addressing it. The article is also for open-minded skeptics who, as they wait to be convinced, are considering financial ideas driven by others who are already "there". If you are a denier, howl at the moon if you must, but you might be better off clicking out of this article; we don't want anyone blowing out an artery.

Causes & Consequences

To help organize my thoughts about the complexity of climate change, I begin by categorizing investment ideas in two ways, those that address the causes of the phenomenon and those that address the consequences of it. For me, investments in both these categories make sense, and six months ago, I held the following positions:

  • Those addressing the causes of climate change including coal to natural gas power plant conversion, wind energy, and smart-grid technologies - General Electric (NYSE:GE), Siemens (OTCPK:SIEGY), and ABB (NYSE:ABB).
  • Those addressing the consequences of climate change in the areas of water management, crop genetics, and tropical disease control - Suez (OTCPK:SZEVY), Veolia (OTCPK:VEOEY), Bayer (OTCPK:BAYRY), DuPont (DD), Monsanto (NYSE:MON), GlaxoSmithKline (NYSE:GSK), Merck (NYSE:MRK), Pfizer (NYSE:PFE), Sanofi (NYSE:SNY), and Intrexon (NYSE:XON).

(As I have mentioned before, I am not currently a fan of solar or nuclear power. The solar industry is still too fragmented and nukes continue to encounter political resistance including with respect to the disposal of spent fuel).

Mixed Results

These stocks on average have underperformed the S&P 500 over the last six months driven down by water and disease management. Suez and Veolia, two of the most formidable water management companies, are stories unto themselves for readers to research on their own. Suffice it to say that I am undeterred but wish they had better leadership.

All U.S. pharmaceutical/biotech companies are threatened by growing doubts that prescription drug prices will hold up under the Trump administration. Most of these stocks finished down 1-3% yesterday after the president-elect's press conference in which he made provocative, one-sided remarks about "pharma", this on top of his apparent sympathy to vaccine skeptic Robert F. Kennedy, Jr.

Except for GE, companies involved in power conversion, renewable energy, grid management, and crop genetics have nicely outperformed the S&P 500 over the last six months. But the leaders have been Siemens and ABB that are European companies, and DuPont and Monsanto that are performing under the promise of uplift from M&A.

Index/ Stock

Price 7/11/16 Price 1/11/17 6-Month Change B/W vs. S&P 500 Annual Div. B/W vs. S&P 500
S&P 500 2,137 2,275 6.46% n/a 2.10% n/a
GE $32.21 $31.47 -2.30% -8.76% 3.06% +0.96%
SIEGY $101.85 $124.11 +21.86% +15.40% 3.01% +0.91%
ABB $19.36 $22.28 +15.08% +8.62% 3.40% +1.30%
SZEVY $7.73 $7.22 -6.60% -13.06% 5.14% +3.04%
VEOEY $21.19 $16.23 -23.41% -29.87% 5.22% +3.12%
BAYRY $102.17 $106.96 +4.69% -1.77% 2.69% +0.59%
DD $64.24 $74.03 +15.24% +8.78% 2.07% -0.03%
MON $102.58 $108.45 +5.72% -0.74% 1.99% -0.11%
GSK $43.52 $39.05 -10.27% -16.73% 5.31% +3.21%
MRK $59.34 $61.63 +3.86% -2.60% 3.14% +1.04%
PFE $36.15 $32.83 -9.18% -15.64% 3.83% +1.73%
SNY $41.42 $40.79 -1.52% -7.98% 4.05% +1.95%
XON $26.23 $25.40 -3.16% -9.62% 0.00% -2.10%
Avg. n/a n/a +0.77% -5.69% 3.30% 1.20%

Two Subtractions, Three Additions

In the second half of 2016, I divested Bayer and Intrexon. I like Bayer and may own it again after its acquisition of Monsanto closes. In the meantime, though, I came to believe that there was no reason to own both stocks especially when Monsanto is dominantly positioned in seed genetics. Incidentally: a) Monsanto recently announced the licensing of key gene-editing technology from Harvard/MIT's Broad Institute, and b) MON still trades at a discount to Bayer's offered price.

I also sold out of Intrexon upon learning that genetic destruction of the disease-carrying Aedes aegypti mosquito may promote population growth in competing species that are potentially as threatening to humans. Even if the science of genetically-engineered mosquitoes is sound, concerns about unintended consequences will continue to delay their wide-scale introduction.

As I continue to study the subject, I also added to my climate change portfolio with investments in Inovio Pharmaceuticals (NYSEMKT:INO), Ormat Technologies (NYSE:ORA), and Fluor (NYSE:FLR). Inovio is working under various grants to develop vaccines against tropical and subtropical diseases including Zika and MERS. So far, INO is in the red for me, but I am encouraged that the company's Zika vaccine has shown a "robust antigen-specific antibody responses in a first-in-man, multi-center phase I trial" in Puerto Rico.

Ormat is formidable in geothermal power that can be an attractive clean energy option. Iceland fully sources two-thirds of its primary energy from geothermal, and many other countries - New Zealand, the Philippines, Turkey, and the U.S. among them - are exploring and developing the potential of the resource. Ormat has a good history, solid fundamentals, and pays a small dividend that has been growing.

I have been watching Fluor for two years as the #1 publicly-traded construction company in the U.S., but I held back because the company is heavily dependent on the struggling petroleum industry. That began to change last year with the recovery of oil prices. However, the specific event that prompted me to move into FLR was Hurricane Nicole. That storm passed over Bermuda contributing to flooding almost a thousand miles away in Florida. Climate change may give rise to higher investment in protective infrastructure for which Fluor is well positioned. In addition, the company may see continuing uplift from standard infrastructure investment expected to be prioritized by the Trump administration and other governments. As with ORA, FLR has done well since I began accumulating it.

Obviously, it's a judgment call on my part on whether a company rates climate change portfolio status. As noted, most of the companies named above operate in other businesses and products/services. Nevertheless, they make my core list because they are positioned to have major impact.

Going Into 2017

Here in table form is the climate change portfolio I take into 2017, reflecting the subtractions and additions above. This is the list that I will report on when I next provide an update. Included are the analyst ratings of these companies as reported by CNNMoney after the close of business yesterday:

Stock Symbol Buy Analysts

Out- Perform

Hold Analysts Under- Perform Sell Analysts 12-Mo. Median Current Price
GE 9 3 6 0 1 $34.00 $31.47
SIEGY 13 1 13 1 1 $125.26 $124.11
ABB 6 1 22 3 3 $21.92 $22.28
ORA 3 0 2 0 1 $53.00 $52.87
SZEVY n/a n/a n/a n/a n/a n/a $7.22
VEOEY 12 0 5 0 0 $22.91 $16.23
DD 7 2 9 1 0 $76.50 $74.03
MON 12 1 5 1 0 $128.00 $108.45
INO 4 0 1 0 0 $12.50 $7.05
GSK 10 1 11 0 1 $44.85 $39.05
MRK 9 1 11 0 1 $67.78 $61.63
PFE 9 3 11 0 0 $38.00 $32.83
SNY 12 2 14 0 1 $44.51 $40.79
FLR 2 1 15 1 0 $50.00 $53.12

Clean Energy ETFs

For two primary reasons, comparing my approach to investing in climate change is apples-and-oranges with buying shares in clean energy ETFs. First, definitionally, the companies in such funds focus on fighting the causes of global warming whereas, as noted, I prefer to also invest into addressing the consequences of the same.

Secondly, ETFs often invest farther down the food chain in mid-size and small-cap companies. While I am open to such stocks (as in the case of INO), I am much more focused on transnational companies because they offer both the clout and safety that I suspect is foundational to alpha-level returns. In particular, they align with a paradigm I introduced in "Whatever You Do, Avoid Major Mistakes," and that is "buy for multiple reasons."

Also, I happen to be a stock picker because I feel I have the background to succeed as one. All this said, there are some solid clean energy ETFs; investors who are interested should work through their financial advisor.

A Word About Big Oil

Notwithstanding my views on climate change, early last year when prices began to turn the corner, I built a portfolio of major integrated oil companies - BP (NYSE:BP), Eni (NYSE:E), Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B), and Total (NYSE:TOT). Heresy, you say? Perhaps, but look, big oil will continue to supply much of our energy for the foreseeable future. Moreover, these companies are stepping up their activities on renewable energy. Royal Dutch Shell, for example, is making a move on wind, as is Statoil (NYSE:STO), Total on solar, and all the majors on natural gas as a cleaner substitute or "transition fuel" from coal and petrol. On the wealth they amassed from oil, these and other carbon-fuel companies have the might to redefine the future of energy if they choose to do so. Beyond that, they are a reasonable hedge in case the Trump administration turns its back on the Paris Climate Agreement.

Strategic Investing and Politics

In my very first article on Seeking Alpha, I advocated for "strategic investing" into "big, developing, scientific, socioeconomic, and political patterns and trends that have not yet been reflected in the price of related equities." In a subsequent article, I expanded on this notion by postulating that the chances for alpha-level returns may be higher by overlaying such new businesses onto traditional ones and investing at the intersection in dominant, transnational companies.

My climate change portfolio satisfied these criteria except that now we must consider whether U.S. politicians have the wisdom and will to head off increasingly urgent environmental challenges - drought, flood and pestilence. There is some evidence that this understanding is taking hold among conservatives. For example, Governor John Kasich recently vetoed a bill that would have extended voluntary clean energy benchmarks that he believes will hamstring Ohio competitively.

But these issues call for consistent leadership well beyond governors. They require active national engagement and herein lies a major rub. On top of his messaging about exorbitant drug prices, Donald Trump has called climate change a hoax and has filled key cabinet positions with folks believed to be unsympathetic to the cause. Then again, he has welcomed the input of his daughter, Ivanka, who apparently believes that addressing climate change should be a top priority of her father's administration. Also, he lives, vacations, and has built many resorts in areas vulnerable to coastal flooding and migrating tropical diseases. And, finally, our soon-to-be president is looking to drive economic and job growth through infrastructure investment; climate change infrastructure(?).

So, climate change investing is up in the air, and I'm conflicted. I'm optimistic in my long-term conviction that: a) Protecting our planet, remaining competitive, and growing economies are compelling arguments on many levels, and b) the results of investing into climate change will take time to unfold not unlike the phenomenon itself. I'm pessimistic insofar as the political climate has made these (and other investments) much riskier in the near-term.

Disclosure: I am/we are long GE, SIEGY, ABB, ORA, SZEVY, VEOEY, DD, MON, INO, GSK, MRK, PFE, SNY, FLR, BP, E, RDS.B, TOT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Always do your own due diligence, including fundamental and technical analysis, in consultation with a competent investment advisor who put your interests above their own. Also, if you are buying foreign shares or receipts, you’re well-advised to consult with a tax accountant with regard to limitations on the use of dividend withholding tax credits. (I donate all my proceeds from Seeking Alpha to charity.)

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.