Generation RENEW:  Finding Your Renewable Sweet Spot

 

Who is excited about the 2021 New York Mets?!  Probably not many people, but let’s talk baseball anyway.  There is a sweet spot on a bat that hitters try to match with the pitched ball.  If executed correctly a ball hit with the bat’s sweet spot will move with much greater velocity into the playing field, and if the trajectory is correct it’ll be gone, goodbye.  Thing is, baseball bats have different sweet spots, and similarly investors have different sweet spots.  What we’re going to try in this blog post is to identify the various sweet spots a renewable investor can target in today’s market, and keeping with the baseball theme we’ve separated the options into three strategies: (1) the Defensive Specialists, (2) the Matchup Artists, and (3) the Sluggers.

 

 

The Defensive Specialists (slow and steady)

We lead off with the Defensive Specialists, which as the name implies targets companies with stable cash flow streams secured with long-term contracts.  In baseball the Defensive Specialists are those that combine singles and doubles offensively with strong fieldwork to win the game.  Over the last three years the Defensive Specialists posted total return of 16% annually (S&P 500: 13%) on risk attributes well below its renewable peers (beta: 0.90; standard deviation: 16.85%). Investors who prefer the Defensive Specialists prioritize stability and likely income in their portfolios, though still want leverage to a multi-decade megatrend.  The downside to the Defensive Specialists is lower relative returns during an upcycle when compared to its riskier peers.

 

 

Source:  Bloomberg

 

The Matchup Artists (asset specific)

We count three indices among the Matchup Artists, which are stocks that target a specific theme within renewable energy.  In baseball this would be similar to matching a left-handed pitcher against a right-handed batter. Not quite as streaky as the upcoming Sluggers, the Matchup Artists posted total returns of 30% annually over the last three years on slightly better risk attributes (beta: 1.19; standard deviation: 29.56%).  We believe the Matchup Artists provide an important option for renewable investors seeking to pick-and-choose the secular trends they prefer.  The downside to the Matchup Artists is a lack of diversification, where if the specific secular trend selected underperforms expectations.

 

 

Source:  Bloomberg

 

The Sluggers (broad based)

Finally we highlight the six indices among the Sluggers, which oddly enough are those that own assets up-and-down the renewable chain.  You’d think vehicles characterized with broad-based exposure would be lower risk, but that is not what we’ve found. For the Sluggers have posted compelling total return of 39% annually over the last three years, though on outsized risk attributes (beta: 1.36; standard deviation: 31.83%).  Furthermore, we found it interesting the vast majority of its high three year returns in fact came in 2020 as the prior two years were +21.1% and -2.1% respectively.  So, we think the term Sluggers is apt, since in baseball these players tend to hit home runs but also strike out quite a bit.

 

 

Source:  Bloomberg

 

In Summary..

We think it’s imperative that investors match their investment goals with the right vehicles, especially in a sector like renewable energy that is still in the early innings. As detailed above, there are several choices in the market, the key is for investors to identify their renewable sweet spot.

 

*Source:  Bloomberg.  Please review disclosure information at the end of this post

 

 
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Michael Cerasoli, CFA

Michael leads the Renewables effort at Eagle Global Advisors, including the development of active and passive strategies, and portfolio management. He is also the Co-Head of the Energy Infrastructure team and Co-Chair of the Energy Infrastructure Investment Committee.  He shares Portfolio Manager responsibilities for the firm’s four separate Energy Infrastructure strategies. Prior to joining Eagle in May 2014 Michael was employed by Goldman, Sachs & Co. for ten years where he covered Midstream for seven years and small/mid cap Oil Services for three.  Prior to Goldman, Michael worked for three years as a sell-side equity trader at various Wall Street firms. He earned bachelor’s degrees in Economics and History from Union College, and an MBA from the Hagan School of Business at Iona College. Michael holds the Chartered Financial Analyst designation.

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Curt Pabst

Curt is a Managing Director in the Energy Infrastructure Business, a member of the Energy Infrastructure Investment Committee, and co-head of the Renewable Energy Business at Eagle Global. Prior to joining Eagle, Curt held a similar position at an Midstream Energy-dedicated asset management firm in Dallas, Texas. He has 39 years of investment experience. He has served as a partner/principal in both a hedge fund of funds and a venture capital fund. Curt earned his BA in Economics from Grinnell College and a professional certification in Energy Innovation and Emerging Technologies from Stanford University.

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