Climate Change Investing: Momentum Building, Trump Notwithstanding

|
Includes: ABB, BAYRY, DWDP, ENGIY, FLR, GE, GSK, INO, JPM, JSAIY, MON, MRK, ORA, PFE, RDS.A, RDS.B, SIEGY, SNY, SPWR, SZEVY, TOT, VEOEY, VOLVY
by: Henry Miles

Summary

We continue to be inundated with news about climate change containing items of actions that governments and businesses are taking to help address the situation.

With a couple of notable exceptions, overall during the last six months, the stocks in my climate change book kept pace with the major indexes including the S&P 500.

I have added two investments to the portfolio reflecting the European Union’s commitment to lead in the race where President Trump has decided to withdraw.

This is my third semi-annual article about climate change investing. I've come to appreciate the visceral reaction the topic elicits from those who choose to turn away from the massive amount of time-series science that our planet is changing in destructive ways. Nevertheless, as has been my practice in the past, I begin this article with links to statistics, observations, and news items about climate change from a wide cross-section of sources. All date stamps are within the last six months, meaning there is no overlap to that which I referenced in previous articles:

Analysis vs. Decision Paralysis

In the past, under some criticism, I have categorized folks in three ways - acceptors, deniers and skeptics. As I continue to read and write about climate change, I'm thinking that we need a fourth label, something like "obfuscators", to describe those who endlessly dissect and reconstruct arguments with what motive we can only speculate. Their presence reminds me of a meeting called by an executive years ago who was frustrated with "analysis paralysis". When he turned to ask me my opinion on the subject, I offered that, 'I don't believe in analysis paralysis but I do believe in "decision paralysis"'. In fact, he was the one with the issue.

I have decided (for myself) to accept that climate change, contributed by humans, is upon us with escalating negative effects. For me, the information seen in the small sampling of links above, and in those that follow, is overwhelming and compelling. Accordingly, I've also decided to deploy a substantial proportion of our financial assets toward dominant transnational companies that are materially, but not exclusively, focused on addressing the causes and consequences of the phenomenon. In other words, this is major area of strategic investment:

  • General Electric (GE), Siemens (OTCPK:SIEGY), and ABB (ABB) dominate in power conversion and electric grids where barriers to entry are much higher than they are for manufacturers of 'appliances' that 'plug into' the infrastructure, such as EV's.
  • Ormat (ORA) is dominant internationally in the narrower, but still important, niche of geothermal energy.
  • Suez (OTCPK:SZEVY) known as United Water in the US, and Veolia (OTCPK:VEOEY) are two of the top water management companies in the world.
  • DuPont (DD) and Monsanto (MON) are global leaders in crop genetics which influenced their pending merger and acquisition with Dow (DOW) and by Bayer (OTCPK:BAYRY), respectively.
  • With grants from DARPA, NIH, and the Gates Foundation, Inovio (INO) is showing promise in races to develop vaccines to fight diseases that are migrating north - Chikungunya, Dengue, Ebola, HIV, MERS, and Zika.
  • Big pharma firms GlaxoSmithKline (GSK), Merck (MRK), Pfizer (PFE), and Sanofi (SNY) are also creating prophylactics and treatments as well as being central to the production and distribution of whoever develops them.
  • And, second only to Bechtel (private), Fluor (FLR) is the largest engineering company in the US and a player internationally with the potential to dominate in the design and construction of infrastructure to counter natural disasters.

Solid Six-Month Results

Overall, these climate change investments carried-over from my article six months ago have basically kept pace with the S&P 500 on a total return basis. The portfolio grew 6.0% compared to the S&P at 6.6%, while returning dividends that today exceed the index by 0.76%.

Stock Symbol

Price 01/11/17 Price 07/11/17 Change 1/11-7/11 B/W vs. S&P 500 Annual Dividend B/W vs. S&P 500
S&P 500 2,275 2,426 +6.6% n/a 2.00% n/a
GE $31.47 $26.38 -16.2% -22.8% 3.69% +1.69%
SIEGY $62.05 $69.48 +12.0% +5.4% 2.79% +0.79%
ABB $22.28 $24.86 +11.6% +5.0% 3.08% +1.08%
ORA $52.87 $55.82 +5.6% -1.0% 0.70% -1.30%
SZEVY $7.22 $9.00 +24.7% +18.1% 3.94% +1.94%
VEOEY $16.23 $21.86 +34.7% +28.1% 3.98% +1.98%
DD $74.03 $82.57 +11.5% +4.9% 1.84% -0.16%
MON $108.45 $117.29 +8.2% +1.6% 1.83% -0.17%
INO $7.05 $7.81 +10.8% +4.2% 0.00% -2.00%
GSK $39.05 $42.01 +7.6% +1.0% 4.71% +2.71%
MRK $61.63 $62.34 +1.2% -5.4% 2.99% +0.99%
PFE $32.83 $33.17 +1.0% -5.6% 3.83% +1.83%
SNY $40.79 $47.80 +17.2% +10.6% 3.44% +1.44%
FLR $53.12 $45.27 -14.9% -21.5% 1.85% -0.15%
Average $43.50 $46.12 +6.0% -0.6% 2.76% +0.76%

The two laggards of the group were General Electric and Fluor. Notwithstanding GE's disappointing performance, I remain optimistic about their climate change businesses. For example, the company recently inked deals with Sainbury's (OTCQX:JSAIY) and JPMorgan Chase (JPM) to rollout LED across their facilities. This is big both in terms of green and when considering that the new lighting is expected to deliver 50%+ energy savings for these formidable firms. Projects of this kind may align with Alexandre Dumas' view that, "Nothing succeeds like success." Upon seeing these clients and numbers, I can imagine other executives saying, 'Let's get on board.' I'm waiting (impatiently, at times).

Fluor has also lagged the market since the beginning of the year. As I detected in a comment about the Solomon Islands in one of my earlier articles, some people (living upland and far away?) seem impervious to issue of coastal flooding. I doubt more concern will be expressed over the relocation of residents in Isle de Jean Charles, Terrebonne Parish, Louisiana. However, my instincts tell me that when the major population centers along the Eastern seaboard face losing businesses and homes to rising water - including at Mar-a-Largo, perhaps - Fluor and lesser companies like it will get the call. Perhaps, a nasty hurricane season will be the tipping point. In the meantime, increased government infrastructure spending would help; we'll see.

Pinpointing Cause & Effect

I'll leave it to readers to assess whether, and to what extent, climate change considerations have affected the performance of these stocks. Dating back to my article entitled, "Whatever You Do, Avoid Major Mistakes", I firmly believe in investing for multiple reasons. Climate change is the primary reason we own these stocks but other factors have also influenced my thinking including span of operations, product diversification, and legislation and geopolitical events.

It will always be difficult to pinpoint a direct, causal relationship between climate change, the activities of these companies, and the performance of their stocks. Nevertheless, I choose to invest in areas that I believe, over time, will rise above the market. In other words, I believe that climate change investing will be alpha-biased or I wouldn't be following the hypothesis while continuing to tune the portfolio.

Two Portfolio Additions

Speaking of which, in the last six month I've added two stocks to our climate change holdings. Before introducing them, I remind readers that President Trump decided not quite two months ago to withdraw from the Paris Climate Accord. Many governors, mayors and executives immediately said that they would align with the international agreement and carry forward with plans to help protect our planet. This was a significant smackdown of the administration.

Meanwhile, various countries have also disregarded Trump. Citing economic and intangible benefits, Chancellor and center-right conservative Angela Merkel urged a bigger German fight against climate change. Moderate liberal French President Emmanuel Macron went even further by inviting US scientists to his country to accelerate their progress in addressing the phenomenon. Among the goals that France has recently announced is the halting of all coal-fired energy production by 2022 and the end of sales of gasoline and diesel vehicles by 2040. Incidentally, for those not aware of it, Macron was formerly an investment banker with Rothschild. I resonate with environmentally-aware capitalists.

Therefore, to the 14 climate change stocks above, I've added two EU names, Total (TOT) and ENGIE (OTCPK:ENGIY). From my vantage point, Total is the most progressive oil major in the arena as evidence by their vision for electricity including their two-thirds ownership of SunPower (SPWR). Total and SunPower recently announced a major solar project in Japan. As most everyone knows, that country is overly reliant on imported hydrocarbons and hasn't had the best of luck with nuclear power plants vulnerable to earthquakes and tsunamis. The solar industry needs a consolidator and Total may just be it.

In other news, two weeks ago, Total sign a 20-year deal with Iran to develop the offshore South Pars field. This is significant for three reasons: a) Its focus is on natural gas, a "transition fuel", b) It is over one of the largest, if not the largest, such reserves in the world, and c) It's the first time in 10 years that Iran has welcomed a EU partner into a consortium (to the displeasure of the US, apparently.) Conversion from old to new forms of energy mandates a very heavy global 'lift' (I'm reminded of the Titan, Atlas). There is no doubt that big oil has contributed to, and profited greatly from, our planetary predicament. However, as opposed to playing the 'blame game', I rather focus on companies that are trying to 'make things right' and with substantial resources to do so. Total is one such company. (So too may be Royal Dutch Shell (RDS.A) (RDS.B) with their announced commitment on Monday to clean energy. However, until we see more tangible evidence, they do not rate a place on this climate change investment list although I do own the stock.)

And then there is ENGIE. This major French utility company appears to be repositioning itself as a leader in addressing various aspects of climate change, notably, in highly efficient, low-carbon, urban heating and cooling networks. To this end, ENGIE recently announced a 40% acquisition in Tabreed, a deal that positions them for important emerging markets in the Middle East. The company is also rumored to be interested in reacquiring the two-thirds stake they sold years ago, under a former incarnation, in water management giant, Suez, mentioned earlier.

Fully Valued with Growth Prospects

Pick your preferred metric, the table below contains some of them as of our reporting date, yesterday, July 11, 2017. With the exception of Siemens, Total and ENGIE, all of these equities are now fully valued. If you accept the premise of my articles on the subject, I'd still hold back waiting for signals that these climate change investments are 'rising to the next level'.

Stock Symbol Price to Earnings Price to Sales Price to Cash Flow Price to Forecast
S&P 500 22.84 2.08 n/a 18.90
S&P BMI 22.66 1.39 10.04 16.18
GE 24.06 1.83 14.55 15.99
SIEGY 17.30 1.27 12.61 16.37
ABB 25.18 1.62 17.34 20.42
ORA 28.22 3.98 12.95 24.37
SZEVY n/a n/a n/a n/a
VEOEY 34.61 0.44 3.39 18.41
DD 27.67 2.87 18.99 21.52
MON 25.66 3.56 25.57 24.10
INO - 15.31 - -
GSK 47.95 2.74 28.06 15.03
MRK 40.25 4.30 18.32 16.35
PFE 28.00 3.78 15.32 13.08
SNY 23.01 2.96 14.47 15.15
FLR 26.90 0.33 11.46 18.50
TOT 16.26 0.89 6.66 12.17
ENGIY - 0.48 7.03 10.23

So, from where will growth come? Two sources: 1) Business-as-usual in their core businesses: aircraft engines, medical equipment, robotics, municipal water systems, seeds and agrochemicals, medicines, on-going infrastructure work, fuel especially natural gas, etc. boosted by 2) Client demand-driven growth for climate-change-related product and services - power plant conversions, alternative energy, new sources of fresh water, innovative ways to fight disease and pestilence, and flood protection.

As the few links at the top of this article demonstrate, it's not often that one wakes up and sees, almost every day, a headline reminding us of climate change and its implications. Fortunately, the number of items that focus on what we are doing about it are beginning to catch up with the bad news. Science, observations, anecdotes and coverage are powerful 'voices' that may soon drown out the deniers among us. Investors, prepare.

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

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 in consultation with a competent financial adviser who puts your interests ahead of their own. Remember, there are added considerations in owning foreign securities including those associated with buying and selling the pinks, foreign withholding taxes on dividends, and ADR fees. (All my proceeds from contributing to SA go 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.