Why invest in clean energy at this time?
Insights — March 2023
T8 Energy Vision’s core universe is trading near to 2008 financial crisis lows in terms of valuation and the fundamentals remain strong
Why invest now?
- T8 Energy Vision’s core universe is small-mid-cap US companies (typically with market capitalisations less than US$10 billion) which are trading near to 2008 financial crisis lows in terms of valuation (the Russell 2000 Index, excluding loss making companies, is trading on 13x, below the 10-year average of 18x and peaks of over 40x). We consider this attractive in absolute terms as well as in relative terms compared to larger US companies and broader equity indices (the S&P 500 Index is trading on 18x which is in line with 10-year average levels and materially above its lows during this period).
- The fundamentals underpinning clean energy companies remain strong while larger US companies have just published their worst results for 12 years (relative to consensus analyst expectations). Clean energy companies were an exception, continuing their trend of exceeding analyst expectations and sustaining high growth rates. During the latest company reporting season which began in February, more than 80% of the companies in our portfolio beat analyst expectations. Further, the median revenue growth rate reported was 35% year-over-year (more than 3x that of the Nasdaq 100 Index, which many investors look to for growth exposure). This continues to underline the fact that an opportunity has been created by misconceptions and liquidity being withdrawn from markets and is not related to company fundamentals.
- We expect the fundamentals in clean energy to remain robust (even in the event of a global recession) driven by regulatory and fiscal government support (such as the nearly US$400 billion Inflation Reduction Act in the US) and continued elevated conventional energy prices (the market prices for crude oil, liquefied natural gas and thermal coal are 27%, 66% and 69% above their respective 10-year averages).
- While attractive smaller companies can go unnoticed, the typical clean energy company in our universe has more than 2x as many analysts covering it, compared to their average non-clean energy peer within the Russell 2000 Index. We believe this makes it only a matter of time until the strong fundamentals and attractive valuations are recognised by more investors.
We strongly believe these factors represent an excellent entry point to a compelling, long-term thematic with significant potential upside.