What the Great Railroads of the 1800s Tell Us about the Clean Energy Boom of 2020

Thursday, 22 October 2020
Melbourne, Australia
By James Woodburn

[6 min read]

What a week.

It’s been jam-packed.

And there’s still the bonus speaker to go.

We haven’t revealed who that is on purpose…because we didn’t know if we’d get her on.

But I’m delighted to say that we did.

Her Perth-based company is a big deal in facilitating the move from fossil fuels to renewables from a technology perspective.

In fact, having the technology to enable it is a crucial part of the transition. And her company is making it happen from right here in Australia.

She’s a former money manager at JP Morgan in London…a PhD in electricity market disruption…and even Deputy Lord Mayor of Perth.

She helped set up Australia’s very first fossil fuel-free pension fund and in 2016 co-founded the blockchain technology company Power Ledger. She also boasts backing from none other than Richard Branson, too.

Now, you could probably find out who it is by Googling those details. But still, I’ll save the reveal for tomorrow.

Today though, I thought we’d get a bit of perspective.

We are investigating this megatrend because there’s no question it’s happening. But that doesn’t mean we are losing our heads.

Below, my colleague, Tom Meyer, with whom I publish Algo Trend Trader, gives his take on the transition to a low-carbon world.

It’s a great read. Do check it out…

Cheers,
Woody

What the Great Railroads of the 1800s Tell Us about the Clean Energy Boom of 2020

By Tom Meyer
System Creator, Algo Trend Trader

The hottest segment of the stock market these days is clean energy. 

Alternatives, solar power, wind power, wave power, batteries, hydrogen, and even nuclear are all buzzwords in this segment. 

And it’s an exciting time. 

Not only are the technologies something out of the future, but there are a lot of companies that have sprung up in the last several years. 

With the excitement of the new technologies comes the excitement of new companies and the potential to make huge profits in the stock market if their technologies are adopted in the energy markets. 

There’s no doubt that new technologies will be adapted and become the mainstream over the next few decades. 

But before you decide to invest everything you have in these new companies, here’s a word of caution for you.

All technologies become commodities

Let me explain what this means so that your expectations are more realistic.

Here’s a chart for the past three years for the iShares Global Clean Energy ETF [NASDAQ: ICLN].

It’s pretty exciting with gains of almost 130%.


Source: Tom Meyer

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Anyone can easily see that this ETF has incredible momentum. 

Algo Trend Trader members, the service I run with publisher Woody, can also see that the volatility in ICLN has increased dramatically. 

The yellow channel has widened significantly in the past six months, which is an indication of the increased volatility. But these gains are incredible and exciting.

Owning ICLN for the past three years netted the investor a terrific return. The trend is higher in the ETF, and the technology is taking over on a global basis. 

So there shouldn’t be a problem owning ICLN, right?

Let’s take a look at another chart. This is still ICLN, but it’s a 10-year view of the ETF.


Source: Tom Meyer

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Not as exciting with the 10-year return for buy-and-hold at just over 20%. 

Over the last decade, the technology has been taking over around the world, but the returns of many of the ‘green’ companies haven’t followed.

To be honest, I’ve set you up with the above two charts. Here’s the reason… 

In the past 180 years, we’ve seen amazing life-changing technologies enter our worlds. And they have changed lives in ways that were unthinkable a couple of centuries ago. 

But the technologies themselves aren’t a guarantee of profitability for every company that enters these new technologies. 

In fact, most companies don’t survive! Case in point. The famous boom of two centuries past was the great railroads across the US. Rail companies sprang up everywhere. It too was an exciting new technology in its day. But still, there were hundreds, if not thousands, of rail companies in the 1800s that ultimately went out of business. 

Below is a photo of a bond that was issued in 1863 from the Elmira and Westport Rail Road Company. 

This was a rail company that had a stretch of rail between Elmira, New York, and Williamsport, Pennsylvania. About 120 kilometres of rail. That’s it. This bond was $500 face value and it paid 5% interest. It was supposed to pay…for 999 years!


Source: Me! It hangs on my office wall

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And here’s the note written just below it

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Of course, the company went out of business shortly after the bond was issued.

It’s easy for us in our modern lives to laugh at this. We have the advantage of hindsight to know this was a lousy investment. But, for the people who lived then, it was an exciting and life-changing technology.

In the 1800s, the railroads changed life for everyone. They opened new frontiers, they allowed for the delivery of crops and manufactured goods to new markets. They created tens of thousands of jobs. It was a technology that brought the industrial age to much of the world.

Today, nobody considers the railroads to be ‘technologically-advanced’. Yes, they have made advancements in their industry, but nobody would put them in the same category as the internet, social media, or green energy.

The same thing happened with the introduction of the automobile in the early 1900s…

Again, we don’t think of the business of automobile manufacturing as a leading-edge technology, but that’s exactly what it was. Life-changing, lifestyle changing, and it coincided with the rise of the middle class.

Did you know that there were about 2,000 automobile manufacturers that went out of business in the first 20–30 years of the automobile’s existence? If you care to look, you can find a list here on Wikipedia.

Airlines have suffered the same fate. Again, nobody can argue that air travel hasn’t changed billions of lives. Mankind had been dreaming of flight since we could look to the skies themselves. But that didn’t make investing in the airlines a good investment.

Warren Buffett said this in his 2007 letter to investors:

The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers.’

Computer manufacturers fall in the same category as well. Nobody can argue that the introduction of the personal computer hasn’t changed the world in a dramatic fashion. But that doesn’t mean that all computer manufacturers made their investors a lot of money.

I live outside of Austin, Texas. About 30 years ago, Dell Computer was one of the fastest growing technology companies, and the stock rose and split several times. 

Many people who lived here became ‘Dellionaires’ from the meteoric rise of the stock price. But once people realised that putting computers together was not much different from farming, the P/E ratio that people were willing to pay dropped dramatically. The split-adjusted price for Dell was above $57 at the end of March 2000. In October 2013, when Dell became a private company again, the stock was down to $13.73. For more than 13 years, Dell was a great company, but a terrible investment.

Does that mean you shouldn’t put any money into the new green energy technologies? Not at all…

There is money to be made in this space. A lot of money!

But understand that most of the companies that are in business today and most that will come onto the scene over the next several years will probably go out of business. 

That’s what history shows us.

Do you want to know who is investing heavily in green technology? 

Yes, the ‘dinosaur’ energy companies! 

Here’s what’s happening with the Big Six oil and gas companies.

BP has 2200 megawatts of wind capacity in the US and has started to reinvest in other renewables over the past few years. They also have an investment in Europe’s largest solar project.

Shell has spent a reported $2 billion on setting up low-carbon energy and electricity generation. They also acquired UK-based electricity and gas provider First Utility as well as Europe’s largest electric vehicle charging company New Motion.

Total is investing $500 million a year in clean energy technologies and planning to increase that over the coming years. They have 1.6 gigawatts worth of solar capacity. The company is also one of the largest utility providers in France.

Eni is behind the other majors, but they are targeting to deliver 1 gigawatt of renewable power capacity.

Chevron has mostly avoided the field after early poor investments. They are creating a Future Energy Fund that will invest in reducing carbon emissions and providing cleaner energy.

ExxonMobil is looking to reduce greenhouse emissions, advancing biofuels, and carbon capture and storage (CCS). Exxon holds interests in about 1/3 of the world’s CCS capacity.

These numbers are from NSEnergy.com in an article dated 16 January 2020.

One of the biggest players in the US is a ‘boring’ utility company called NextEra Energy Inc [NYSE:NEE]. They have interests in wind energy, nuclear energy, and other clean and renewable technologies. They are also the top constituent of XLU, the ETF for the S&P Utilities.


Source: Yahoo Finance

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The price of NEE five years ago was close to $100/share. Friday’s closing price above $300/share shows that they’re doing something right and it probably has to do with their investments in green energy.

In closing, it’s natural to be excited about these new technologies and new advancements in how we’re going to generate and consume power over the coming decades. 

As investors, we need to understand that many companies, perhaps most companies, will probably be poor investments. 

But there will also be some incredible opportunities in this field to nicely profit in the coming years. 

You can’t just guess or invest in every new company that comes along.

It’s going to take experts who have studied the science and understand the evolution of the technology and which companies are going to be the leaders going forward.

And that’s exactly what you’ll find at the keynote speech hosted by Woody and featuring our energy expert, James Allen.

Check it out here.

Regards,
Tom Meyer