Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Robin Batchelor, fund manager for BlackRock's New Energy Investment Trust.
The new energy sector went from stockmarket darling to pariah within the space of just a few years, after being hit hard by the global financial crisis. Indeed, it has dropped off the radar of most mainstream investors. Yet the long-term drivers, including energy security and climate change, have not gone away. Furthermore, industry costs are falling more rapidly than most had expected, many areas are continuing to enjoy strong near-term growth and sector valuations, relative to broader equity markets, are near all-time lows. That creates interesting opportunities for the patient investor. Here are three of them.
Quanta Services (NYSE: PWR), a US contractor that is heavily involved in the construction of electricity networks, is an interesting bet in the energy sector. Investment in the whole power grid is required to replace ageing equipment, absorb increasing volumes of renewable energy capacity and improve system efficiency. After decades of under-investment, we now appear to be in the early stages of an investment up-cycle: $16bn of large transmission projects were awarded in the US over the last two years, compared to less than $10bn for the 2000-09 period as a whole. As the leading North American grid contractor, Quanta is well positioned to benefit from this strongly increasing demand, with earnings set to double in the next two years. Despite this compelling outlook, the current valuation is below historic levels.
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Novozymes (Copenhagen: NZYMB) is a manufacturer of enzymes that are used in a range of applications such as ethanol fuel, energy-efficient washing powder and food and beverage products. A strong management team, exposure to several structural growth prospects and high barriers to entry have proven to be a potent combination; the stock has outperformed world equity markets (represented by MSCI World) in all but one of the last ten years.
On top of the company's significant existing growth platforms, Novozymes also has an exciting opportunity in second-generation ethanol, whereby the whole crop rather than just the edible part is used to produce fuel. It's early days, but this process could require as much as a ten-fold increase in enzyme usage, with Novozymes well placed to benefit.
Of all the areas of the new energy sector, renewable energy was the most impacted by the financial crisis. It was hit by lower power demand and tighter financing conditions. Yet, even with such headwinds, we are finding attractive investment opportunities. EDP Renovaveis (Portugal: EDPR) is one of them.
EDPR is one of the largest owners of wind farms, with assets in both the US and Europe. Despite offering strong visible cash flow generation, the stock has been de-rated on weak sector sentiment and financing concerns. The latter reflects its position as a listed subsidiary of the Portuguese utility, EDP. The recent decision by China Three Gorges, a large Chinese utility, to acquire a 21% stake in EDP (the parent company) and commit to providing funding for EDPR suggests that this concern may be overdone.
Buying a Portuguese company in the midst of the current eurozone crisis may not appeal to all investors. But with the company trading below book value, you are currently not even paying full whack for the existing asset base, let alone the firm's attractive growth opportunities.
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