Investors have jumped on the clean energy bandwagon in a major way over the past year.
I believe clean energy is a megatrend that investors can profit from…
But I don’t believe in the specific clean energy stocks that investors are most interested in.
They should be buying something else…
A Pick-and-Shovel Play if I Ever Saw One
The best way to make money during the California gold rush of the 1840s and 1850s wasn’t to prospect for gold.
Instead, it was to sell picks and shovels to the thousands of adventurous prospectors who were looking to strike it rich.
While exciting, prospecting for gold has a very small chance of success.
It is extremely high risk and extremely high reward.
Selling shovels is different…
While it lacks adventure, the odds of success are certain.
Today, investors have gone bananas for electric vehicle (EV) stocks.
I’ve covered the story often here at Wealthy Retirement.
I’ve discussed how the stock market valuations on stocks like Tesla (Nasdaq: TSLA) and Nikola Corp. (Nasdaq: NKLA) are absolutely absurd.
While I fully agree that we are on the verge of a boom in electric vehicle sales, I have three big problems with owning these EV stocks…
- As I said, the valuations of these stocks are insane considering the companies don’t yet make any money.
- Picking which companies are going to be the big EV winners is extremely difficult.
- I don’t understand why people think that even the EV manufacturers that win the biggest market share are going to be highly profitable.
For decades, we have watched major combustion engine car manufacturers go out of business. Do we think making EVs will be more profitable?
Instead of trying to “prospect” in the pool of EV stocks, investors should focus on the companies that are going to be supplying the “picks and shovels” that electric vehicles need…
Electricity!
Utilities Are About to Become Much Less Boring
For decades, the utilities sector has not been a growth story.
Utilities are viewed as nice solid dividend plays with no earnings growth to drive share prices higher.
I think that is about to change…
Even better, the market isn’t pricing future growth into these stocks.
As American drivers gradually stop fueling up their automobiles at the gas pump and instead start plugging into the electric grid, demand for electricity will go higher.
That is bullish for utility companies that supply that electricity.
As demand for electricity rises, utilities are also going to transition away from coal and toward solar and wind power.
These companies are both going green and profiting from the green movement.
Over the next 20 years, utility companies will spend tens of billions of dollars expanding their power-generating ability.
That will generate a solid return on investment for these businesses.
In recent years, earnings growth for the utility sector has been in the very low single digits.
In the coming years, the analyst consensus is that the sector will see steady annual earnings growth of almost 10%.
That may not sound like much, but it is more than enough for this sector to generate years of excellent returns.
First, the market has to revalue these stocks to a higher valuation multiple. It must reflect their shift from no growth to strong, predictable, long-term growth.
While a no-growth company might get valued at 10 times earnings, a steadily growing company will get valued 50% to 100% higher.
Second, the many years of nearly 10% earnings growth will keep pushing stock prices and dividends higher.
The best part is that this is a very low-risk sector to invest in.
So leave Tesla for the speculators who are desperately searching for gold.
Utilities are for investors who like the certainty of selling picks and shovels.
Good investing,
— Jody
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Source: Wealthy Retirement