Our Essex Global Environmental Opportunities Strategy (GEOS) investment philosophy is rooted in a long term perspective with an investment horizon meaningfully beyond the brief attention span of today’s average investor. The secular trends we are positioned for with GEOS, and have been articulating over the past several years are reflected in the strong performance for clean technology stocks this year. This sharp outperformance of clean tech stocks obviously begs the question, “Is this outperformance sustainable?”
Undoubtedly, some of the recent outperformance is mere “catch-up” as many clean tech stocks have been market laggards. Over the past few years, seemingly anything even peripherally related to clean tech has been shunned by mainstream investors. And a good portion of companies in our purview have been very heavily shorted by hedge funds which have madly chased these stocks higher in a painful effort to cover and limit their loss of principle. But the real catalyst of the outperformance is simply the market’s realization that the underlying trends in which GEOS invests are real and adoption is happening – NOW. Clean technology fundamental trends are rapidly moving past the initial inflection point.
The second quarter of 2013 has seen a number of important developments that highlight the ripening of the GEOS investment themes. As we have stated in the past, corporations have recognized the need to embrace technologies and solutions that allow their continued growth in a more efficient manner while using fewer scarce resources. In essence, companies are doing more with less while also minimizing their environmental impact. From the past three months, a few important examples of these trends:
- Verizon announced that it will be investing $100 million to install solar panels and fuel cells at more than a dozen facilities that will generate and use the clean power. According to the company, “Verizon decided to make the clean-energy investment out of a desire to be more socially and environmentally responsible, and because the economics made the plan worthwhile.”
- Tesla Motors, Elon Musk’s start-up auto company which has designed and manufactured the highly acclaimed Model S electric vehicle, recently posted its first quarterly profit. This is a remarkable achievement for a young company in the severely competitive auto industry.
- ABB Ltd, the Swiss based leader in power and automation technologies, has agreed to purchase Power-One, Inc., a manufacturer of power conversion products and inverters used in solar installations. ABB is paying $750 million for Power-One, which is more than a 50% premium to Power-One’s closing stock price the day before the announcement. This is ABB’s first foray into solar and highlights the importance of solar energy to the future of the power industry.
- United Parcel Service announced that 100% of the trucks that they will purchase in 2014 will be powered by natural gas. Procter & Gamble announced that by the end of 2014, 20% of the truck fleet that they hire will be powered by natural gas.
- The Wall Street Journal penned a remarkable piece on May 28th discussing the threats on the horizon for the traditional business models of electric utilities. The article quotes Nick Akins, the CEO of American Electric Power, discussing the need for clean energy and distributed generation: “we see this as an opportunity because our business is changing. There’s no getting around it.” Such utterances from the head of an electric utility would have been considered blasphemy in years past.
Corporations are advancing down these paths for two primary reasons: it is the right thing to do from a social and environmental perspective and it makes economic sense. The first reason was always evident, but that alone was not enough to have corporations make a big commitment. The tipping point for mass adoption is the advancement of these technologies such that adoption achieves the required economic return. As evidenced by the examples above, we have hit the tipping point for many of the GEOS themes. After the early adopters have moved, the rest of the industry needs to embrace these advancements and technologies or they will be at a significant competitive disadvantage.