Buy Hold Sell: 5 daringly disruptive stocks

The theory of "disruptive innovation" was introduced in the well-thumbed pages of the Harvard Business Journal in 1995 by Joseph Bower and the late Clayton Christensen.

In it, they outlined the case for classic disruption - a small enterprise targeting an overlooked proportion of the population with a new but modest offering, and gradually growing to challenge industry incumbents. 

In this theory, disruption only occurs in two cases: in low-end, less profitable markets, or in completely new markets altogether. However, over the past 27 years, "disruption" has shape-shifted to become a tell-all term for a business with a heck of a lot of growth potential, usually followed in tow by a slew of imitator start-ups, and of course, industry incumbents quickly pivoting their business models to catch up. 

And what could be more disruptive than decarbonisation? 

So in this episode, Livewire's Ally Selby was joined by Nanuk Asset Management's Peter Wilmshurst and Pella Funds Management's Steven Glass for their thoughts on three companies that dare to disrupt incumbent industries as the world shifts to net zero. 

Plus, they also each name two companies that could become global leaders in one of the world's most important megatrends over the coming three decades. 

Note: This episode of Buy Hold Sell was shot on Wednesday 27th April 2022. You can watch the video, read an edited transcript or listen to the podcast below.

Edited Transcript 

Ally Selby: Hello, and welcome to Livewire's Buy Hold Sell, I'm Ally Selby. And today, we're going global in the search of the best stocks for exposure to decarbonization. Why decarbonization? Well, in December, 62% of surveyed readers told us that they were thinking of investing in this megatrend in 2022. So today, we are joined by Steven Glass from Pella and Peter Wilmshurst from Nanuk for their analysis of five market-leading stocks for exposure to decarbonization. 

First up, we're going to talk about electric vehicles and semiconductors. They seem to be the best performing sectors of the market in this space so far. Peter, I might start with you. Do you see this continuing or are there other sectors in the market which look more compelling in terms of valuation right now?

Peter Wilmshurst: We actually think with the run-up we've seen in some of those really high-profile areas that the valuations aren't as attractive anymore. So we think there are more compelling decarbonization net-zero opportunities in areas like building energy efficiency, rail, packaging, alternative materials, and the like.

Ally Selby: Steven, are you still investing in electric vehicles and semis?

Steven Glass: Well, we think electric vehicles are very, very expensive. We just can't make the valuation stack up. Today, the startup electrical vehicles are 60% of the global market cap for vehicles, but less than 10% of the revenue. So we just can't make the numbers stack up. So we haven't invested in the startup electric vehicle space.

Tesla (NASDAQ: TSLA)

Ally Selby: That's completely insane. Okay. Let's get on to some stocks. First up, we do have an electric vehicle producer and manufacturer, it's Tesla. It doesn't really need any introduction. Steven, is it a buy, hold, or sell?

Steven Glass (SELL): Tesla is a sell, in Pella's opinion. We cannot make head or tail of the valuation. By our numbers, it has to be selling over 20 million vehicles by 2030. It's going to do maybe 1.5 million this year. Its margins have to be over 20%, which we don't think is achievable. We can make the valuation work, so that's a sell.

Ally Selby: Over to you, Peter. It's taken investors on a wild ride in 2022, it's down around 27% year to date. Is it a buy, hold, or sell?

Peter Wilmshurst (SELL): It's a sell, notwithstanding that short-term sell-off from a pretty extraordinary run. You've got an extraordinary company, extraordinary CEO, perhaps matched or even exceeded by an extraordinary valuation. So we wouldn't disagree with that. You've also got the OEMs coming. If you look at Volkswagen, BMW, Hyundai, and Kia, they're all going to have more EV models than Tesla in a few years. And they're certainly catching up on the technology side as well. Mercedes recently had a model that went 1,000 kilometres on a battery with some juice left in the tank. So they're catching up with Tesla and we think the valuation's just too high.

Infineon Technologies (ETR: IFX)

Ally Selby: Next up we have Infineon, a German semiconductor manufacturer. It's actually one of the top 10 producers of semis in the world. Peter, staying with you, is it a buy, hold, or sell?

Peter Wilmshurst (BUY): Infineon's a buy for us. It's a significant contributor to both autos and power semis. Two key themes underlying the business: electrification and digitization - both of which play to the decarbonization theme. It's a company that's grown double digits historically, and we think they'll deliver that going forward. But with concerns about the semiconductor cycle the stocks sold off and it's now trading on a P/E of about 15 times compared to its historic average of 22. So a buy for us.

Ally Selby: Over to you, Steven, its share price is down around 34% in 2022, should investors be buying the dip? Is it a buy, hold, or sell?

Steven Glass (HOLD): Infineon is a hold for us, but it is edging towards a buy. So we actually agree with everything Peter said. For us, we would like to get it a little bit cheaper. The one reason we're a bit reticent at the moment is they're not investing as aggressively in their CAPEX as STMicro (EPA: STM), which is one of its competitors. So at the moment, we're actually more in STM, but it's held up a bit better and we think that Infineon is one that we might be switching into in due course.

Vestas Wind Systems (CPH: VWS)

Ally Selby: Last but not least, we have Vestas Wind Systems. This is a Danish manufacturer of wind turbines. It actually generates more than 145 gigawatts of energy with its wind turbines in 85 different countries. Steven, staying with you, is it a buy, hold, or sell?

Steven Glass (SELL): Vestas is a sell. There's a lot to like about it. It is the leader in wind turbines. It has a global footprint. It's got a great service business. The list can go on. However, it is expensive, especially considering a key risk that we've identified. There's something called "Lost Production Factor", which tells you the problems they experience with their turbines. This has gone from 2% to 3%, which doesn't sound like a lot, but it is actually a big number when you think about it. This means most of their new turbines must be having problems. So we are expecting a negative announcement from them in the not to distance future. So we think it's something to avoid for the time being.

Ally Selby: Peter, over to you. Its share price is down around 6.22% since the beginning of the year, not as bad as Tesla and Infineon, is it a buy, hold, or sell?

Peter Wilmshurst (SELL): It's a sell for us, and for many of the same reasons. The valuation just doesn't stack up. Yes, it's got exciting growth. It's a really clear leader in wind energy, which we're big believers in. But this is a company that's had a really patchy track record of profitability in the past. If you look back over the last 10 years, they've averaged a 10% profit margin. People think they'll get back there in a couple of years and if they do so, they're on almost 40 times earnings. So good growth, but the valuation's just too high for us.

Ally Selby: Okay. I'm really excited for this. We asked our fundies to bring along one stock that they think can be a global leader in the race to net-zero by 2050. Peter, what have you brought for us today?

Carrier Global (NYSE: CARR) 

Peter Wilmshurst: So for us, it's Carrier. So the company was spun off from United Technologies a couple of years ago, and really one of those leaders in building energy efficiency. And if you look at decarbonization, buildings use around 30% of energy demand, and 18% of greenhouse gas emissions. So Carrier has committed to decreasing their customers' greenhouse gas emissions by one gigaton by 2030, that's about double Australia's emissions. So it's a really meaningful cut and the company thinks they'll double their rate of business' usual revenue growth through building energy efficiency and digitization of buildings. And for that, you're paying 18 times earnings. So we think that's an interesting play on what's a pretty key theme.

Ally Selby: Okay. Over to you, Steven, your time in the hot seat, what's your next global leader in the race to net-zero?

Ørsted (CPH: ORSTED)

Steven Glass: We think Ørsted, which is a Danish utility. It's a buy. Ørsted is the leader in offshore wind utilities, in actually developing the projects. And the reason we think it's very interesting is that it's got a huge growth outlook. Wind energy is increasingly going to move offshore. It is the leader. It's proven to be very, very well-managed. It walks away from contracts that it doesn't think will be profitable and has demonstrated that time and again. It still has a 25% market share and strict price discipline. It's got over 2,000 people in its engineering department always overlooking these things. And we also think it is a great play on green hydrogen because green hydrogen is going to need things like wind turbines in order to manufacture it. So we think it's got a very, very attractive long-term growth profile and we think it's a very attractive company to invest in.

Ally Selby: Well, I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel, we have so much awesome content coming over the coming weeks.