Barron’s Weekend Summary: Clean-energy stocks are collapsing
Cover:
-Clean-energy stocks are collapsing. Their performance has been the worst in years, triggering related stock valuations to shed tens of billions of dollars and endangering America’s environmental goals. Car makers such as General Motors and Ford Motor have delayed plans to roll out electric vehicles. Offshore wind developers are canceling or delaying their projects and even residents of climate-conscious states like California, are buying fewer solar panels for their roofs. The fallout has caused 76 of the 77 stocks in the Invesco WilderHill Clean Energy ETF—a green-power benchmark—to fall for the past three months (the one stock to rise is a tiny fuse maker). The ETF itself is down 32% since the start of the year, compared with a 14% gain for the S&P 500
Interview:
-This week, Barron’s ventures into the realm of behavioral psychology and its connection to finance; because, it features an interview with Simeon Siegel, a senior analyst at BMO Capital Markets. Siegel has spent 15 years covering retailers and brands, winning accolades from investors and the media for his sharp observations about companies and consumers:
“I love anything that appeals to the emotional nature of spending,” he says. “When a company can turn a want into a need, and cause you to spend way more than you planned—that’s fascinating to me.” The timing of the interview is not coincidental, given that overspending is often on display during the fast approaching holiday shopping season and he also shared his thoughts on TJX Cos and Nike.
Tech Trader:
-Nintendo is changing from a simple videogame maker to a dominant entertainment conglomerate. Nintendo’s success is multifaceted: from game sales to theme parks and movie adaptations. Over the past week, Nintendo reported solid profit growth for the first half of its fiscal year and beat guidance thanks to robust game sales from its latest Mario and Zelda releases. Nintendo raised its fiscal 2024 net profit guidance to JPY 420B yen (about $2.8B) from JPY 340B. It also increased its forecast for software units to 185M million from 180M. But, Nintendo also announced that it’s developing a live-action movie based on its hit videogame franchise, The Legend of Zelda. The film will be co-financed by Nintendo and Sony Pictures Entertainment, with Sony
SONY
The Trader:
-Mercury Systems shares fell 12% to $32 after the company reported a quarterly adjusted earnings of $2 million, down 94% from the previous year and below forecasts for $29M. Revenue was $181M, down 20% versus the consensus estimate. Mercury Systems, a small-cap defense company, has a unique aerospace and defense business, producing electronics and chips found in high-tech military programs like F-35 fighter jets, Predator unmanned aerial vehicles, and Patriot surface-to-air missiles. The company has been investing in research and development and acquiring subsystems, which carry higher sales and profit margins but are more complex than its previous products.
-The energy sector's recent downturn contrasts with the robust fundamentals of individual oil stocks, highlighting the importance of trusting the market. Mid-cap US oil-and-gas companies meet Barron's criteria for growth, value, and momentum. Take Diamondback Energy, whose operations are concentrated in the West Texas Permian Basin. Shares trade for around seven times expected earnings over the coming year—versus 18 times for the S&P 500
—while analysts model earnings-per-share growth of 16% in 2024, four points better than the index. And Diamondback stock has outperformed the S&P 500 both this year and during the market pullback that began in August. The same is true of Targa Resources, Range Resources, and Southwestern Energy.
Features:
-Moody's Investors Service has lowered the US's credit rating from stable to negative, citing the federal deficit as a key driver. The firm retained its top AAA rating for US credit, unlike other major credit rating firms. Moody's said the downside risks to the US' fiscal strength have increased and may no longer be fully offset by the sovereign's unique credit strengths. The agency also highlighted political polarization within US Congress as a concern, as it raises the risk that successive governments won’t reach consensus on a fiscal plan to slow the decline in debt affordability.
-Koch Industries, a company that focuses on zero-emissions, recently launched a unit called Koch Strategic Platforms (KSP) to invest over $1B in start-ups targeting lithium, batteries, and lithium-battery systems. In 2021, the market was enamored with electric vehicles and special-purpose acquisition companies (SPACs). KSP made nearly a dozen green investments through SPACs, providing a glimpse into the investing of America's second-largest private company. However, since early 2021, KSP's picks have posted an average loss of 58% on a cap-weighted basis. The profitable buyout of one firm, REE Automotive, has also seen a 67% loss on average. KSP was disbanded in November, and its holdings were sold to other Koch portfolios. Most investors have lost money on clean-energy stocks since early 2021, with the iShares Global Clean Energy exchange-traded fund down 56% due to rising interest rates and changing prices.
Europe:
-Organized labor has returned to the US, with successful strikes by the United Auto Workers and Hollywood writers and actors. However, 2023 has seen a shift in labor unrest in Europe, with the UK experiencing a post-Margaret Thatcher peak in February and Germany shutting down for a one-day "megastrike" in March. As autumn approaches, the winter-spring labor actions have been successful, with German postal workers receiving an average 11.5% pay increase in March and U.K. teachers receiving 6.5% in July. These union successes have rippled across economies, with wage hikes running at 7% to 8%. Governments have also taken direct action to cushion citizens from inflation, with Germany spending 2% of GDP on energy costs in 2022 and France and Italy each subsidizing 1% each.
Emerging Markets:
-No update this week
Commodities:
-No update this week
Streetwise:
-This week, Jack Hough speaks to David Herro, longtime manager of the Oakmark International fund, about this. Herro sees much value in European stocks. What gives Herro confidence in European stocks now is the comparison with bond yields. Hero likes Lloyds Banking Group, an insurance marketplace associated in America with sometimes dubious reports of celebrity body-part coverage. Herro also likes Bayer. Bayer has had a new CEO since June, American drug executive Bill Anderson, who promises a business shake-up and increased cash flow. “He’s just what the doctor ordered,” says Herro. Shares are 6.5 times earnings.