Profiting From Green Energy – But Not EVs (NASDAQ:ENPH)

The Ever-Changing Energy Investment

We have been talking about fossil fuels and their impact on the environment for years, but only recently has the auto industry decided that the time has come – and come quickly. As of April 2023, Tesla Model Y was the largest selling single model in the world according to GreenCars.com and CNET.com. It is followed by the Chevrolet Bolt, Ford Mustang, VW, Nissan, and all the other manufacturers, including Bentley. Many of those companies plan to be all electric by 2030, as per Forbes Wheels.

Does that make Tesla, or any of them, a good buy?

Investing in EVs

Let’s look at some of the bigger players in EVs over the past five years. Chart 1 shows the rise and fall of Tesla and the brief rise of NIO. Chart 2 shows the stock prices of the three companies clustered at the bottom of Chart 1. While prices are falling for all five manufacturers, Tesla’s sales are growing, as shown in Chart 3. Its share of the EV market at the end of 2022 was 50.5% according to Counterpoint research.

Chart 1. Returns of 5 auto manufacturers and SPY from 2018.

Chart 2. Returns of 3 auto manufacturers and SPY from 2018.

Chart 3. History of Tesla’s sales.

Having said that, why are the stock prices falling? You could argue that Elon Musk was distracted by the Twitter purchase and sold TSLA stock to accomplish that. But it is more likely that competition drains the market of buyers. Even cars known to be less quality will sell at a lower price. In another scenario, some new manufacturers could not deliver as planned, and lost market share and credibility.

Invest Now?

There is no indication that EV stock prices are ready to move higher. If you are a value investor, a low price is tempting, but the wait to turn a profit can be long. As a technician, I wait for the trend to turn up. That hasn’t happened.

I don’t believe Tesla will make a new high. Competition continues to increase. There are more choices at a wide range of prices.

What About Charging Stations and Lithium?

EV opportunities are more than cars. They need parts and service, and the most critical are charging stations (both home and commercial) and lithium.

There are a lot of companies competing for charging stations. The two most recognized are Enphase (ENPH) and ChargePoint (CHPT), shown in Chart 4. Their competition is privately held companies, Autel, Emporia, JuiceBox, and Mustart. Because of the scale, CHPT is shown separately on the right.

Chart 4. Companies competing for EV charging. (Left) Enphase and ChargePoint. (Right) ChargePoint.

As for lithium, most of the estimated global lithium resources are located in Australia and the salt flats of Bolivia, Chile and Argentina (see Chart.5).

Chart 5. Production of lithium, 2021

The easiest way to invest in lithium is by buying shares in the Lithium ETF, LIT and Albemarle (ALB, refining). Chart 6 shows the 5-year price history of lithium. Although the news seems to imply possible shortages, prices have not continued higher.

Chart 6. Lithium prices from 2018.

Lithium processing is holding up better than EV prices or charging stations, as shown in Chart 7. Compared to SPY, they are very volatile. They also depend on the current battery technology. That could change.

Chart 7. Prices of companies dealing in lithium.

The Economics of EVs

The car runs perfectly, you are helping the environment, and not paying for gas. What could go wrong?

Cars are normally charged at night when electricity prices are lowest. Electric companies have different rates for each hour of the day. But as more people get electric cars, night-time demand will increase as will the cost. Even now, if you use a charging station you pay about the same as gasoline. For a guide to charging costs, see Kelley Blue Book (KBB.com).

You are not paying gasoline tax, an important income for the State. That will have to change. The State will find another way to tax your car, most probably by mileage, perhaps by value. There will be no government subsidy for buying EVs.

Power companies will need to produce more electricity, using natural gas or even coal, offsetting some of the environmental benefits.

In the end, you will have done your share for the environment, but you won’t save any money. And what about those people who live in apartment buildings in New York, Houston, San Francisco, and Chicago. Where do they plug in their cars?

Other Choices

Let’s move on from cars. There are other opportunities, such as solar, wind, natural gas, and nuclear. I’ll save nuclear for last. Chart 8 shows the growth of these areas from 2000. All six sources have increased over the past 20 years. It is likely that the demand for energy has increased and each source has shared in that increase. Is one of them a better investment?

Chart 8. Terawatt hours generated by the major electricity sources.

Solar, Wind, and Hydropower

Solar energy seems to have promise. Wind is facing problems of blade repairs. Hydropower has been used for decades, but floods and droughts can affect output. Chart 9 shows three major providers of solar power, NextEra Energy (NEE), First Solar (FSLR), and SunPower (SPWR). All of them have returned better than the S&P over the past five years, although SPWR has been extremely volatile.

Chart 8. Providers of solar power.

Investors interested in wind farms should look at CleanChoice, NextEra, Brookfield Renewable, Clearway, GE, and Siemens.

Let’s Not Forget Natural Gas

Natural gas provides 31.8% of U.S. power. The U.S. is essentially self-sufficient but Europe is not. This past winter Russia stopped the flow of natgas to Europe, disrupting prices. Nevertheless, winter was mild and shipments of LNG from the U.S. kept Europeans safely supplied. A disaster avoided. Chart 9 shows the price of natural gas futures. The spike at the beginning of 2001 coincided with the negative price of crude oil. During the Covid pandemic, there was little demand for crude oil, caused an unprecedented drop in price.

Chart 9. Natural gas prices compared to SPY.

Natural gas is now at the lowest price seen in years. it is surprising given the increased demand for electricity. We would expect prices to rise from here.

Nuclear Energy

Environmentalists don’t like nuclear energy. Disposing of the nuclear waste is a problem. The half-life of strontium-90 is only 30 years (half the radioactivity is gone) but plutonium has a half-life of 24,000 years (source: OneEarth.com). That’s a long time.

The newest development is the micro reactor, or SMRs (small modular nuclear reactors). They are said to be able to power 10,000 homes for 10 years without the chance of a meltdown. You can also build your own tiny reactor at home, but you will want to be very, very careful!

Perhaps we can get to the point of a nuclear-powered car. No need to plug it in or use gasoline. Buy one for life.

Where To Invest?

For me, Chart 8 tells it all. Every area of energy production is in demand but very few seem to be a good investment. Most important, investors jump from one solution to another. First hydrogen, then solar, then wind, then lithium, then cold fusion. And we still use fossil fuels.

The only solution that seems sensible are companies doing all of this – diversification. They are the big energy companies, ConocoPhillips (COP), Brookfield Renewable (BEP), Chevron (CVX), and NextEra (NEE), among others. Chart 10 shows that all of them have returned more than the S&P over the past five years. They are more volatile because a single stock will be more volatile than an index. If we average these returns we get the result shown if Chart 11. Not as volatile and outperforming the S&P.

Chart 10. Four major energy companies compared to the S&P.

Chart 11. Averaging the diversified energy companies.

After all that analysis, no one energy source stands out as a good investment, but a company that diversifies has better returns and will not be subject to wild swings based on the next market fad. A company concentrating on a single product will always be more volatile than one that diversifies. It is also a better investment.