Already, some sustainable stocks have begun to fall back, especially in the tech sector. But doubters say green stocks have much further to fall
Author of the article:
Financial Times
Laurence Fletcher in London
A wind farm in Movave, California. Photo by REUTERS/Mike Blake/File Photo Hedge funds have been cranking up their bets against sustainable energy stocks, wagering that as interest rates rise, investors will be less forgiving of companies with strong environmental credentials but weak earnings.
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Shares in sustainable stocks have drawn in billions of dollars of inflows from ethically minded investors in recent years, lifting the valuations of some stocks to eye-watering levels.
Already, some of those stocks have begun to fall back as the United States Federal Reserve prepares to start withdrawing its pandemic-era support, a process that is pulling down many high-growth assets, especially in the tech sector. But doubters say green stocks have much further to fall.
“In a bear market, a company doesn’t trade at 60 times earnings just because it does something morally good,” said Barry Norris, chief investment officer at Argonaut Capital Partners LLP. “People will be a bit more hard-nosed about it.”
In a bear market, a company doesn’t trade at 60 times earnings just because it does something morally good
Barry Norris
Norris is shorting a number of wind-power stocks and has recently increased his bet against Danish wind turbine maker Vestas Wind Systems A/S. In November, the company warned of an “increasingly challenging global business environment for renewables,” citing global supply chain problems and higher costs.
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The company’s shares soared from 130 krone at the start of 2020 to peak briefly above 300 krone a year ago, although they have fallen back to about 170 krone. However, Norris believes Vestas, whose margins are contracting, is now “the most expensive it has ever been.”
Shares in green companies are not the only ones trading with elevated valuations. Tesla Inc., the electric car maker, is priced at a forward price to earnings rate of 92 times, while Nvidia Corp., another popular stock in recent years, is priced at 43 times.
Germany’s Nordex SE has also been targeted by short sellers, with bets against the wind turbine manufacturer soaring from 0.79 per cent of the company’s shares a year ago to more than seven per cent, according to data group Breakout Point. That makes it one of Europe’s most shorted stocks based on disclosed short positions.
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Among hedge funds betting against it are US$52-billion-in-assets Millennium Management LLC, AKO Capital LLP and Gladstone Capital Corp.
It is a risky strategy. Government-supported efforts to shift the global energy reliance away from fossil fuels point to heavy demand for companies in the sector. One executive told the Financial Times their fund “won’t touch” bets against such stocks, because of the increasingly favourable regulations and weight of money pouring into the sector.
But hedge funds in the U.S. and United Kingdom have been buying the lowly valued shares of oil and gas companies discarded by investors focused on environmental, social and governance (ESG) factors.
Betting against companies whose stories of helping the environment are stronger than their earnings, or against those that have exaggerated their ethical credentials, has also become increasingly attractive.
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The prospect of four rises in U.S. interest rates this year is also now providing a challenge for loss-making green stocks. Higher interest rates mean higher borrowing costs for companies and a lower value ascribed to future cash flows.
Funds have targeted hydrogen stocks, with disclosed bets against Norwegian hydrogen technology group Nel ASA, which reported a loss of 1.4 billion krone (US$156 million) in the first nine months of last year, jumping from 1.8 per cent a year ago to 7.8 per cent, according to Breakout Point.
Helikon Investments Ltd., Crispin Odey’s Odey Asset Management LLP and WorldQuant LLC have short positions against Nel, whose shares have risen from five krone three years ago to more than 35 krone a year ago but have since dropped to about 11 krone.
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“There is no obvious valuation support with Nel,” said James Hanbury, a partner who manages about US$1.3 billion in assets at Odey, in a note to investors seen by the FT.
More On This Topic Goldman, Citi strategists say it’s now time to buy after stocks selloff Tesla needs to deliver blowout quarter to reclaim trillion-dollar market value Microsoft’s slowing cloud growth casts shadow over report The company is “loss-making, cash consumptive, they continue to fail to win material contracts or partnerships, their medium-term capex needs are not fully funded and, on top of this, the (Odey) team perceive the business to be a commoditized technology offering,” he said.
He added that while hydrogen would play “a big role” in the transition to cleaner energy, there will “inevitably be many companies in the space that will not succeed economically.” Odey declined to comment.
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Article content A spokesman for Nel said the company is “the technology and market share leader in an industry that is at the beginning of significant growth and industrialization”, adding that its investment was “backed by a robust financial position.”
Hedge funds have also increased their bets against France’s McPhy Energy SAS from 0.5 per cent a year ago to 5.5 per cent and against Norwegian plastic recycling technology company Quantafuel ASA from zero a year ago to 4.3 per cent.
“We think the end game this year will be to short the Ark-type of stocks in solar (and) hydrogen,” said Renaud Saleur, a former trader at Soros Fund Management LLC who now heads Anaconda Invest SA, referring to more speculative groups. He is short hydrogen groups ITM Power PLC and McPhy Energy SA and solar technology company Enphase Energy Inc.
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Article content This is exactly the sort of stock you don’t want to own
Barry Norris
Some managers have even risked bets against electric-vehicle stocks, which has proved to be one of the most volatile corners of the market.
Argonaut’s Norris has put on a short position against Tesla in recent days, and is also betting against Rivian Automotive Inc. He said the company, whose investors include Amazon.com Inc. and Daniel Loeb’s Third Point LLC, is on a “ridiculous valuation” and lacks first-mover advantage in the sector, while he also highlighted Amazon’s recent decision to order electric vans from a rival.
“My view is that we’re going into a bear market and we’re past the point of peak speculation,” he said. “This is exactly the sort of stock you don’t want to own.”
The Financial Times Ltd.
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