A friend of mine posed the question yesterday – “how do I make money from this EV transition?”
My immediate thoughts were words like: popular, crowded, challenged business models, etc. Somewhat the equivalent of playing soccer and trying to score a penalty kick by arcing the ball around 3 rows of defenders, three goalies, and having the wind blowing strong in the right direction to score a goal.
On the way home I tried to challenge myself to think any ways that allows an investor to shoot the ball from a few feet out of bounds behind the goal where nobody is looking, and perhaps bounce it off the foot of some unassuming goalie only to see the ball bounce backwards into the goal. What I mean by this is, is there a way to play the trend that nobody is looking at today or, is there a way to play that most investors cannot play?
While a bulletproof answer to such a difficult question of making money in the EV transition is elusive, I had one thought along the lines of the shot behind goal…
Coal is an un-investable asset class. It is universally hated by investors and the public. Banks have entirely stopped lending to the sector, sending companies packing to Chapter 11 or forcing them to run debt-free. The terminal value of these businesses is valued at near zero.
Never-mind these businesses are printing cash today as a collision of geopolitics and oil and gas underinvestment has driven a resource shortage. Most management teams continue to focus on coal exclusively, as they don’t have a pathway to anything else. However a select few are trying to morph to survive the energy transition.
These companies are good at one thing, mining. In a global economy, mining is achieved at lowest cost in resource rich countries with a poor population. However, the geopolitical regime of today is not the same as the one of only a few months ago. And if one truly believes the EV transition will come faster and bigger than people imagine, new possibilities emerge.
One coal management team is specifically scouting renewable energy opportunities, to which in the past I had always thought, “this team has no advantage at anything in renewables versus the crowd of renewables specialists.” Enter the Q1-2022 earnings commentary in response to a question:
To that end, I think an opportunity that may be interesting is companies that are off limits for most investors (ESG negative companies), that are trading at undemanding valuations (the above company happens to be trading at something like 3-6x earnings with a 10%+ dividend yield), and making potential inroads to use their skills to produce raw materials that power the renewable economy.
While not the perfect shot on goal, an investment like this may give the downside protection of real cash earnings at a low multiple and upside optionality of the upcoming climate transition. And importantly, most investors either cannot or will not make an investment like this, handicapping the odds of not losing money / giving a shot at making substantial money more in the favor of the investor.
Making money in a crowded field is hard, but certainly some investors will make it happen, either within the crowd or just outside of it.
Disclosure: This is not investment advice, do your own work.