Climate moneyball: the star player stocks aren't the usual suspects

Have you seen the movie Moneyball? Based on the Michael Lewis book, Moneyball: The art of winning an unfair game, it tracks the Oakland Athletics baseball team and the efforts of their manager Billy Beane (played by Brad Pitt) to assemble a competitive team.

The motif was adopted by Nanuk Asset Management in their latest presentation to financial advisers. Tom King OAM, CIO explained his thinking: 

"The outlook for sustainable technology hasn't really changed significantly over the last twelve months... But the investment outlook has changed quite significantly. And the topic Moneyball provides some themes or messages that are very relevant today."

The first is that the obvious or popular approach may not be the only or the best way to achieve your objectives.

And the third analogy or message is a question, is it time to have a swing?" 

Note: The presentation on Wednesday 18 October 2023 includes mention of several stocks. Nanuk Asset Management holds these stocks in their Nanuk New World Fund. You can read my recent interview with Tom King here. 

Sentiment towards stocks bearing a "sustainable" badge has shifted over the past two years, according to King. In short, sustainable technology stocks today aren't so egregiously cheap that they are a ‘home run’ and guaranteed to outperform, but he argues that over the medium term (say 5 to 7 years) the odds have become increasingly good that they will. 

In recent years the world has recognised the almost certain longer-term adoption of key sustainable technologies such as EVs and renewables, and to a lesser extent hydrogen: However, while they are important, they only address around one-quarter of the world's global emissions problems, King noted. People now realise that the world needs to use all the solutions available at a much larger scale. He also highlighted that investment returns in these areas have disappointed since early 2021.

The short answer, according to King, is no – sustainable technology stocks are not so cheap that investors can be assured of outperformance. But although they could still underperform, their investment potential today should not be ignored. The real question, King posed, is “if not now, when?”.

"Over the medium-term, we believe you are more likely to come out ahead than behind investing in sustainability themed equities today," he argued.

He cites four reasons for this view:

• Recent market performance of sustainability themed equities improves the odds of future outperformance.
  In 2021, higher growth technology stocks underperformed, but more traditional areas of environmental investment like waste management and sustainable packaging performed well. 2022 saw a different dynamic with the war in Ukraine, rising interest rates, oil and gas stocks performed well and many stables like tobacco also performed well. These sectors are usually excluded from ESG or sustainability funds and consequent led many to significantly underperform. The big trend in the markets in 2023 has been the performance of the large cap US tech stocks, the FANGs. As a cohort. these stocks account for between 17-20% of global indices, more than half of global equity returns this year are due to these stocks. The trends of the last two years are unlikely to continue indefinitely and the underperformance of sustainable themed equities is increasingly likely to reverse of the medium term.
• The hype is nearly gone.
  The hype and elevated valuations associated with higher growth clean tech stocks have largely evaporated, with the share prices of many having completely retracted significant gains during 2020.
• Policy expectations are pretty low.
  "The pervasive attitude seems to be today that we can't afford to invest in decarbonisation anymore because of inflationary pressure. It's politically not acceptable. " But climate issues continue to worsen, and it is highly likely that policy and regulatory support for sustainable technology will be increased, not decreased, as we move through this decade.
• Good reasons why profits in sustainable technology companies are likely to improve in the next year or two.
  With an exposure focused on industrial technology being used by industrial customers, sustainable technology companies typically have limited exposure to consumer end markets, and many stand to benefit in 2024 and beyond from strong policy support in major economies and the expansion of margins as cost inflation eases.

Nanuk’s portfolio managers outlined several stocks owned by the Nanuk New World Fund that illustrate how the manager is seeking to capitalise on the current situation through good quality businesses offering both attractive valuations and exposure to growth trends.

The team of five portfolio managers gave examples of stocks that they believe illustrate this theme.

Advantest Corporation (XTKS: 6857) is a Japanese company providing semiconductor testing equipment.

"Every single chip on your smartphone, in your car, PC or in a data centre undergoes rigorous testing to ensure quality, safety and reliability," says Marie Miyashiro.

Advantest tends to trade in line with semiconductor stocks, with the stock price based on a function of its market share and the size of the semiconductor market. As the complexity of chips increases, the demand for testing increases; Miyashiro’s view is that test revenue wasn't just simply a function of market share and market size but of the increasing complexity of advanced semiconductors and the increasingly sophisticated testing required. She noted that Advantest operates in a duopoly with its nearest competitor Teradyne (NASDAQ: TER) but that Advantest is becoming an effective monopoly in higher-end testing applications.

Are you taking a swing on climate players? Let us know in the comments which sustainable stocks you are investing in