One of the big investment topics of this decade could be the return of those neglected and hated sectors that did not fit into boldly advertised ESG policies. Dirty, careless, only return focussed, etc. Yet, that’s not the same as not needed or replaceable, not to mention affordability. On the other hand, you have greenwashing, higher costs of living and ousting of non-liberal, more conservative customers with silly messages and acts. BlackRock is writing it and the market is speaking. Listen.
Summary and key takeaways from today’s Weekly
– BlackRock, an advocate of ESG policies, is facing increasing difficulties with its political agenda.
– It is not possible to appease everyone.
– A decision will have to be made – either lose business or get creative. Proclaimed dirty and neglected stocks have a good chance to benefit.
What was already brewing under the hood, could now finally be released.
I am talking about the reversing of ESG policies.
They did sound fine in theory, but practically resulted in higher costs of living, angering and dividing people with different views (middle-of-the-road and especially conservative) and regarding my core topic investing in stocks, led to a gigantic misallocation of capital from non- or little compliant companies to those great in marketing and self-promotion, but who failed miserably to deliver operationally.
Not to mention that most “green” goals still depend on what’s hated.
Everyone knows what I am talking about.
The shift from coal, oil, gas, nuclear and proclaimed legacy minerals to wind, solar, software instead of hardware (industry), EVs and hydrogen, but also “future minerals” like lithium, neodymium (needed for magnets), cobalt and nickel. Just to name a few.
Has it worked?
Why haven’t they invented wooden, fully environmentally friendly windmills? Even this assumes no excavators or chainsaws are used. Or transports of those axed trees by horse-pulled buggies?
Reality can only be denied for so long.
This big capital shift – together with unprecendent low cost of capital – has led to increasing stock prices of operationally sick companies that not seldom rely on forever-subventions either through tax rebates or directly taxpayer’s money while cash flow generating and self-sustaining companies that can contribute by paying taxes instead of taking out of the pot, got punished by capital restrictions.
There were already great bargains and returns to be made, but this could have only been the beginning. None other than BlackRock itself, one of the big ESG advocates, seems to be slowly shifting back, because of (potential?) harm to its business.
It is easy to demand change and restraint from others when you’re not affected.
Preaching water for others, but drinking wine oneself. However, when it comes directly to your wallet, you’ll rethink certain things – at the latest at this point, if you haven’t done already due to moral aspects.
Central planning by bureaucrats does not work and sooner or later leads to a hefty eruption in the opposite direction. Also, at some point, investors start to lose patience when losses become too big.
That’s why stocks from certain sectors could be due for a massive rebound due to a reallocation of capital from silly to considered and rational. Also, in the past ESG was good to change labels, when pleasant.
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as per 06 February 2024 market close – since August 2022
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BlackRock rolling back?
When thinking and talking about BlackRock (ISIN: US09247X1019, Ticker: BLK), one of the first things that comes to my mind – besides ETFs and being an investor almost everywhere with its 10 tr. USD in assets under management – is the promotion of so-called stakeholder capitalism and ESG frameworks.
ESG stands for environmental, social and governance – you’ll likely know that.
What they mean by that is written on their page.
The key sentence is this one (highlights by me):
BlackRock’s systematic experts discuss how they use sustainable investing and a data-driven approach to identify characteristics that seek to benefit both shareholders and stakeholders in pursuit of investment opportunities.
BlackRock (see here)
But you should also read the fine print below that which states (highlights by me):
An investment’s environmental, social and governance (“ESG”) strategy limits the types and number of investment opportunities available and, as a result, may underperform other investments that do not have an ESG focus. An investment’s ESG strategy may result in investing in securities or industry sectors that underperform the market as a whole or underperform other investments screened for ESG standards.
BlackRock (see here)
What reads like a theoretical risk has proven in many cases to be a practical money grave. First, we had inflated asset prices due to false hopes in many nice-sounding, but unprofitable adventures on one side and ultra-depressed prices of still profitable businesses with even improving fundamentals from an investor’s perspective.
We are not talking about one of them trailing by a few percentage points, but some being at their lows, while others knock on their all-time highs.
Just think of wind or hydrogen compared to coal or oil.
Those who promise but don’t deliver fail, while those who do not promise too much but deliver reliably are being rewarded. Just two examples, the notoriously hyped and failed Plug Power (ISIN: US72919P2020, Ticker: PLUG) compared to the US’ biggest met coal producer Alpha Metallurgical Resources (ISIN: US0207641061, Ticker: AMR).
The former has never achieved profitability and constantly needs new cash injections, while the latter is self-financing its operations, but is starved off of external financing sources due to ESG.
Any questions?
This picture is now upside down – but that could have likely only been the beginning.
Besides the fact that there’s lots of room for subjectivity and greenwashing (pretending to be green or overstating irrelevant things), a politically motivated influence is part of the game. Also, it is debatable whether buzzwords like sustainability are defined in the first place or whether cherry-picking is the main tool.
While I do not want to dive into politics, this cannot be rejected out of hand.
Or why for example is wind energy supposed to be “green and great” and sold that way to the public, while its consequences to the environment like slowing or even turning off wind in areas behind the windmills (onshore), a redirection of water currents (offshore), vibrations, defacing the environment, not resolved recycling issues or immense use of “dirty” material not part of the same discussion?
I am not even mentioning double and parallel structures or base load energy at less efficient levels that are needed to live an unrealistic and expensive dream. A waste of precious resources at its best!
Promised, that’s it in this regard. I’ll turn now to the investment ramifications.
What we know is that after certain bubbles bursted, not only have painful losses accumulated, but also investors have been burnt and angered.
One does not invest to receive indulgence, but for a risk-adjusted return on their capital.
When you see the following, you might think that the so-called renewables are a growing market and a must-have investment (you can neglect nuclear here).
Also, it might be tempting to assume that these types of “clean” energy pushed the legacy alternatives back.
But better look closely – the same screenshot, but with a third row.
More demand form a higher population is one thing.
But the other is that renewables do not replace or displace coal, oil and gas, but they – at best – complement them, though even that is questionable.
And if you use the same axes for a cleaner picture, you get this one:
Despite trillions invested, that’s barely scratching the surface, if at all.
If you add now the resulting stock market returns from these sectors, you’ll see that there’s room for improvement, to put it mildly. The question is only, whether improvements are realistic, but that’s not today’s topic.
Efficient allocation of capital is something else. The market does not lie.
Admittedly, I haven’t picked the biggest funds, but I wanted to dig out certain themes, topics and buzzwords. If that’s not enough, you can also have a look at the charts of nickel (see here), neodymium (needed for magnets, see here) or lithium (see here), but also individual stocks from these sectors.
They all have one thing in common: a brutally bad performance for shareholders.
In times, when markets are close to their all-time highs.
The reasons?
Elevated hopes, utopian dreams and excessively high assumptions for demand without having thought about real demand, affordability, customer’s preferences or acceptance in the first place and their financial abilities, not to mention profitability and self-sustainability of those companies.
It might have worked for a time, but now that the tide is low, you see who’s swimming naked, to indirectly quote Warren Buffett.
In the end, BlackRock, despite its massive influence, is there to earn money and not to be a caritative entity, despite maybe demanding that from others.
If you now grab BlackRock’s annual report and enter the risk section, you stumble upon a few interesting passages, worth highlighting. I am not talking about the usual investment risks due to potential underperformance and clients pulling money, thus decreasing income from fees, which are already important.
But look here:
Or here, the core part in text form (highlights by me):
In addition, BlackRock’s business, scale and investments subject it to significant media coverage and increasing attention from a broad range of stakeholders. This heightened scrutiny has resulted in negative publicity and adverse actions for BlackRock and may continue to do so in the future.
BLK annual report 2023, p. 32 (see here)
Any perceived or actual action or lack thereof, or perceived lack of transparency, by BlackRock on matters subject to scrutiny, such as ESG, may be viewed differently by various stakeholders and adversely impact BlackRock’s reputation and business, including through redemptions or terminations by clients, and legal and governmental action and scrutiny.
BlackRock has a major influence and it can also draw negative publicity, for example due to being too aggressive on the political landscape by hitting opposing views, but also due to underperformance of their investments.
Relativ underperformance is one thing, but devastating losses another one.
As they have 700 bn. USD in such underperforming assets or 7% of their total assets, there’s a lot at stake.
At the same time, highly profitable companies like those from the coal sector or offshore drilling have market caps only in the single billions with valuation multiples also in the single to low-double digits.
Imagine if just a few bucks switched sides to improve the return profile.
And this is from BlackRock alone!
I am not saying that this will happen immediately, but one should exercise some thought experiments in this regard.
Then, you also have the topic of facing subpoenas in ESG probes which happened to BlackRock and State Street, another big investor.
What’s wrong here? By favoring certain sectors and excluding others, there’s a potential conflict of interest, even potentially violating antitrust laws.
It won’t be under the carpet forever. It’s just a question of time.
Also, it is an open secret that the camps of blue and red are highly divided in this regard.
Below, you see a snippet where it is said that “conservative groups are targeting Wall St. asset management firms […] over their ESG investing platforms”. It is about sponsoring and money flowing.
I am sure BlackRock does not want the streams to dry up.
The question whether “shareholders or stakeholders” is a tough one answer.
What is nigh to impossible is to appease all groups, because then no one will be happy.
In this regard, they’ll need to get inventive by relaxing rules or at least relabeling certain groups, like they did with the defense sector or with nuclear energy in Europe (outside of Germany).
So why not calling oil a strategically important resource, thermal coal the base-load energy enabler for green energy or met coal the supplier for green energy, as met coal is needed for steel production which in turn is needed for all forms of renewables?
Sounds great, doesn’t it?
You can’t have your cake and eat it too.
For my members, I jumped in early on this insanity.
Despite some crazy frenzies around AI, I know where the risks are and where the chances are.
By looking at this from a risks-first perspective, I am totally fine with my ideas that I published in my reports. I know that I wrote about needed and financially sound businesses with real and hard assets at low to decent valuations with upside potential.
With this, you could have grabbed profitable businesses with clean balance sheets and often growth attached to it, but also generous capital return programs to shareholders almost for pennies on the dollar – at least proverbially.
In many cases, it is not even too late.
Of my 20 ideas so far, my five best performing ideas are currently from the sectors of:
- uranium
- oil production (2x)
- oil service
- met coal
Just to give you two examples:
My met coal pick is up by 33% including dividends and it has switched to repurchasing its own stock aggressively, after it cleaned up its balance sheet. It does so at a free cash flow to enterprise value valuation of around 5x. Although I don’t like this word, that’s close to a no-brainer.
This is a highly profitable company that’s not going out of business anytime soon.
When having to choose between Nvidia (ISIN: US67066G1040, Ticker. NVDA) with its free cash flow yield of at best 2% or my met coal pick with a FCF yield of 20% – I do not have to think too long.
My uranium pick which is up by 72% is currently in correction mode after having doubled last year. Although the price of uranium backtracked a bit recently, the supply issues are by no means solved. They even got worse after the two industry heavyweights announced not to have met their product targets and one already capping its 2024 goals.
This does not even factor in any increasing demand from new reactors that are currently constructed all over the world – just based on the status quo!
Conclusion
BlackRock, an advocate of ESG policies, is facing increasing difficulties with its political agenda.
It is not possible to appease everyone.
A decision will have to be made – either lose business or get creative. Proclaimed dirty and neglected stocks have a good chance to benefit.
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