Sector Xpress Greentech Advisor | July 7, 2021

Electric Delivery
The first half of 2021 ended up being a needed retracement of the first leg of the new bull market that started in March 2020. The bear move from February to mid-May pushed the Greentech sector into a loss for the six months, anywhere from 1% to 10% depending on your benchmark. Yet we’re still in a long-term uptrend and investors continue to pour money into Greentech: the three largest environmental stock funds saw inflows equal to 33% of their assets under management this year, through June, easily the best six-months ever for Greentech investor inflows.

In this issue of SX Greentech Advisor, we present two businesses, one a recently public prime-mover in utility-scale energy storage and analytics; the other a long-time auto parts supplier that sees big growth ahead in the redesign of electrical systems for EVs. Also inside, our recurring look at the top three technically strong ESG stocks, our Greentech Timer, and a review of our portfolios.

Also, please join me for the 9th Annual Smarter Investing, Greater Profits Online Conference, August 17-19. We have an incredible lineup of Cabot experts ready to share their best picks for the back of 2021 and into 2022.

“It is undoubtedly the greatest economic opportunity of our lifetime. The winning companies won’t be worth billions or tens of billions. They’ll be worth hundreds of billions or trillions if we can pull off that goal.”
Ben Kortlang, founding partner of venture capital firm G2 Investors, on the U.S. carbon reduction goal of 50% cut by 2030.

Feature Story: Stem Inc.

The rise of renewables means there becomes more intermittency in the energy market. As renewable energy critics are quick to point out, the sun doesn’t always shine and the wind doesn’t always blow – and neither may happen when people demand electricity the most.

Solving that problem means the market for energy storage is set to boom. Today, there is annual demand of 800 gigawatt hours (GWh) of electricity storage, according to the Department of Energy in a December 2020 study. The market will grow to 2.5 to 4 Terawatt hours (TWh) – as much as five times the current level (a TWh equal 1,000 GWh). That’s likely conservative, especially if the U.S. can commit to the administration’s stated goal of halving greenhouse gas emission by 2030.

Energy storage isn’t a new idea: in 1909, the Swiss opened the first dedicated energy storage facility of pumped storage hydropower (PSH). The concept is simple: pump water from a lower level up to a higher level, behind a dam, when it can be released and run through a turbine generating electricity when needed. There are many other forms of energy storage too, including thermal (heat transference), compressed air, hydrogen, lead and li-ion batteries and more experimental batteries. Given the needs for facilities that can provide power for minutes up to many hours, the practicality of having storage localized and the technological advances that make the old hub-and-spoke grid design outdated, the long-term market solution will likely be a combination of many of these. For the next decade, lithium-ion batteries likely will be the fastest growing segment of the storage market, because li-ion is highly efficient (compared to, say, lead acid batteries), has a long cycle life and good energy density. A separate storage market analysis, from Credit Suisse, expresses the market growth in different terms than the Department of Energy but predicts a similar trajectory: the run rate of annual sales of storage will need grow more than six-fold, from 12 GWh of product this year to 76 GWh in 2026.

Stem, Inc. (STEM) is a leading utility-scale energy storage company and appears poised to remain a leader in the storage market as it booms. Stem sells li-ion storage and, more importantly, the software to optimize their product. Stem’s central product is what it calls Artificial Intelligence, a software package called Athena, which optimizes how energy storage is utilized. Put simply, it gets systems charging when electricity is cheaper and feeding into the grid when it’s more expensive. The company says its systems boost the rate of return for new and existing renewable systems (or replacing competitor storage systems) in the double digits, thanks in large part to its AI. (And since AI is a somewhat loaded term, we’ll call it machine learning, ML, a more specific type of AI in which software learns from patterns and can execute decisions.)

Stem has more than 950 clients already. That’s a first-mover advantage, since an advantage of ML is that the more data a company has, the more it can hone its algorithms and keep expanding its competitive edge. Stem dominates the large storage demand market of its native California, with a 75% share. While it just started operations last decade, it is the second-largest provider of battery storage world-wide in terms of total storage commissioned, at about 625 megawatt hours (MWh), trailing only Hyundai Electric at 650 MWh and ahead of number three Tesla (TSLA), which is in the high 500 MWh area. In a sign of just how quickly the storage market can scale, Stem has grown its market share from 0% to 20% in Massachusetts in three years. In 2020, 90% of the company’s bookings came from outside California. In total, Stem has about one-third of the U.S. market.

To corporate electric customers, known as the behind the meter (BTM) sector, Stem’s value proposition is that Athena reduces electrical charges by 10% to 30% a month thanks to its optimizing algorithm on when to charge and when to sell back into the grid. The gains are made by extensive data mining Stem is able to do based on its information from existing customers and how its ML reads new customer patterns. There’s further value the company believes customers see in that being able to store and sell energy helps meet corporate ESG goals to be carbon neutral. Stem says Amazon (AMZN), Wal-Mart (WMT), and Apple (AAPL) are among its clientele.

For utilities, the front of the meter (FTM) customer, Stem’s energy storage system similarly stockpiles electricity when prices are low and discharges when prices are high and helps level out grid capacity. FTM clients include Ameresco (AMRC), an engineering firm that owns and operates renewable installations on behalf of customers who wish to be asset-light, and Syncarpha Capital, a private equity firm that specializes in owning renewable assets.

There are 13 ways energy storage can be monetized, according to a matrix developed by the Rocky Mountain Institute. Most companies offer one or two ways, while Stem says it offers 11 of the 13 ways, as the company-provided graphic, taken from a May investor presentation, shows.

Hardware-wise Stem is agnostic, sourcing its battery hubs from other manufacturers without any particular preference. Management says some of those may become competitors, in which case it will stop sourcing hardware from them. Stem makes 10% to 30% gross margins on the hardware it sells. Athena is key to the business. It has a gross margin of 80%, suggesting that one day, Stem could be quite profitable (the business, as noted below, loses money right now). Athena is sold as a software-as-a-service model, at a price per KWh per month. Athena is contracted long term, in periods ranging from 10-20 years, compared to shorter terms elsewhere in the SaaS world.

The third leg of the company’s revenue trident is a fee it takes for allowing corporate customers to participate in wholesale energy markers, such as when a Home Depot sells its stored energy back into the grid or when an (unnamed) southern California logistics firm drains vehicle batteries into the grid at peak times to make revenue and recharges later. Stem generally sells into newly built renewable projects, but sees a strong potential market in retrofits, where existing renewable farms can boost their internal rate of return by adding smart storage.

There are other storage and data businesses. For us, the story with Stem is all about storage growth and the company’s first-mover advantage. In the first quarter of this year, sales were $15.4 million, quadruple the year-prior quarter of $4.1 million. The net loss was $82.6 million, wider from a loss of $17.5 million. Looking ahead, the company has $221 million in contracted backlog and a $1.43 billion 12-month pipeline. For 2011, the company expects total sales to be $147 million. The business has a strong seasonality, with the first and second quarters contributing roughly 10% of sales each. The third quarter generates about one-third of annual sales and the fourth quarter half of total revenue.

For 2022, Wall Street sees Stem doubling sales again, to $350 million and turning its first net profit. Looking further ahead, which admittedly becomes more speculative, the street sees Stem surpassing $900 million in sales in 2024 with earnings per share of 72 cents. That suggests that while STEM is a pricey 31 times expected 2021 sales, it should justify the current price in a year or two. On the books, the business is in good shape, with no debt and $500 million cash, which will help it take on larger, more capital-intensive projects for clients. In the next five years, the US market is seen tripling and the global market nearly tripling (Stem has business in Europe and Japan). One opportunity that is also a risk to shares if it fails to materialize, is that there is an expectation a U.S. infrastructure bill will include an investment tax credit specific for energy storage. That would be the first U.S. tax credit for the segment and would add another 25% upside to the market, according to Wood Mackenzie, a research firm.

Stem went public by merger with a SPAC that closed in April. As is typical of SPAC action in recent months, the close of the deal led to a sell-off in shares, as investors booked profits (often selling shares but holding warrants). More recently, the PIPE investors – those who provided extra investment to allow the SPAC to bring more cash to Stem to close the deal – have filed to sell most their shares. It’s unclear if they intend to – the filing to allow selling at will was part of the PIPE financing agreement – but we should assume some selling pressure to come. Still, Stem shares have recovered from a mid-May low of 16.38 and worked back into the 30s, with shares making higher lows and higher highs since the start of June, both bullish signs. Its Relative Strength, share performance versus the S&P, is very good, at 97 (equal to the S&P would be a 50), and strong RS stocks tend to maintain their strong outperformance for a few months. Based on our preferred volatility measure of three times the Average True Range of shares (a measure of what would be normal price moves) we could see shares step down to test the 40-day moving average at 29, while various chart projections say a move to 46-50 could be in the cards soon.

What to Do Now
Stem is young to market and likely to be volatile. There is support at 34 and then 29, and a move lower toward those would be a preferred entry point. While a young stock, the all-time high is well above the current price at just below 50 and probably should be considered the ceiling unless compelling news changes the fundamental outlook. Let’s watch for now and be prepared to buy on a dip. We will send a special alert when the time seems right to enter a position. WATCH

Stem, Inc. (STEM)
Revenue (2020): $36.3 million
Earnings per share (2020): ($17.48)
All-time high (intraday): 51.49
Market cap: $4.5 billion
Recommendation: WATCH

Feature Story: Aptiv plc.

Global sales of electric vehicles (EVs) finally seem to have hit critical mass. There were 3 million EVs sold worldwide in 2020, a 40% rise from 2019 – and that’s despite total auto sales declining during the pandemic. It’s projected this year will see another rise by more than a third, to 4.4 million EVs sold worldwide. By the end of this decade, EVs are expected to be upwards of 90% of new vehicle sales in Europe and 70% worldwide by 2040, by various estimates. Picking winners on the manufacturer side is a bit murky at the moment: who captures market share – Tesla, a transitioning major automaker, or one of the many EV upstarts? More critically, what manufacturer loses market share?

For right now, at least, the wiser investment may be to not pick the name plate winner, but rather the suppliers that will benefit from the macro trend regardless of what marque wins or loses. As we’ve mentioned in these pages before, EVs require a great deal of wiring as well as high-end technology and quality materials. In particular, EVs need a lot more high-voltage electronics. A typical new internal combustion engine (ICE) auto, which bristles with technological features itself, requires electrical components like low voltage wiring, low voltage connectors and cable management parts. An EV doesn’t need certain equipment – all those things tied to the ICE engine – but it does need a lot more of other things, including high voltage cables, high voltage management, connectors, battery disconnect boxes, power distribution boxes, chargers and charging sets among other components.

Aptiv plc (APTV) is an auto parts supplier that makes about $500 per car supplying electrical parts for ICE vehicles. It sells into one of every 3.5 conventional autos globally. The company sees itself selling $1,200 worth of components for EVs and is in one of every two EVs hitting the market from 2020 through 2022. Aptiv is an Irish company that was once Delphi, the auto components subsidiary of General Motors (GM). After becoming independently traded and changing its name it expanded its focus from just traditional parts to innovative high-end electronics for the autonomous driving evolution that may (or may not) really come to fruition. But much of the autonomous technology has made its way into cars already. Now Aptiv has expanded its focus on the past year to EVs, emphasizing to investors that the sector is chock full of growth opportunities for the company.

For one, the “nervous system” components Aptiv supplies are designed, where possible, to reduce the number of connectors and wires needed, eliminating crucial weight as manufacturers are very conscious of the weight problem EVs face (a typical passenger EV weighs as much as a larger ICE pickup truck). There are nearly three miles of wiring in an EV, about 10% more than an ICE vehicle. Aptiv says its design architecture for EVs allows the trimming of hundreds of feet of wires and precious weight. Its “smart vehicle architecture” is a redesign from scratch of EV electrical systems. According to the company, EVs right now are often repurposing identical systems from ICE autos to EV versions. So, for instance, in a car’s traction system, there are EV versions using the identical ICE structure, which means 985 more feet of wires in those EV models than needed, Aptiv says. Big picture: Aptiv says automakers using its electrical architecture, software and components, can build an EV that has 25% less wire and related component weight that a typical EV and 10% less than the equivalent ICE. That weight savings means net cost savings for automakers. As a major auto supplier, Aptiv is already heavily in Tesla EVs, as well as Volkswagen’s new ID EV line, as well EVs from Ford, Volvo and GM. By 2023, Aptiv will be in 23 EV car makers overall.

The emergence of the high-voltage market for Aptiv has been quick. In 2019, high-voltage components accounted of 2% of company sales, or about $250 million. Sales are proceeding so well that the company will tally $1 billion in high-voltage sales this year, a year ahead of its schedule and by 2025 the company should see $2.5 billion annually, about 10% of total sales, from high voltage. Wall Street feels Aptiv’s projections are conservative, and the company has been prone to increase various projections unexpectedly. Last week at a presentation on its EV business, it boosted its estimate of revenue per EV from $1,000 to $1,200, consisting of $850 in high-voltage, EV specific equipment on top of the remaining $350 of low-voltage equipment that carries over from ICE vehicles (eliminating the combustion engine removes $150 worth of components.)

What to Do Now
The 160 mark is shaping up to be immediate resistance, a level that has been touched 11 times since February. The lows are getting higher, which is bullish, but shares could be settling into a new range with 160 as the top and a narrower base, around 147. The 40-day moving average at 150 also marks some earlier chart support, and as shares move toward that mark, without breaking below, it would be a good time to buy. We’re going to watch here and look for how shares react to testing support. WATCH

Aptiv, plc (APTV)
Revenue (trailing twelve months): $13.69 billion
Earnings per share (TTM): $1.69
All-time high (intraday): 160.53
Market cap: $42.3 billion
Recommendation: WATCH

The ESG Three

The ESG Three are three technically strong stocks selected from the 200 most-held stocks in ESG funds. ESG funds do hold environmental stocks in their portfolios, but by and large they tend to focus more on blue-chip companies drawn from every industry which are rated highly in social and governance aspects. These aren’t formal stock picks but suggestions for those looking to explore additional stocks beyond the Greentech portfolio.

Moderna (MRNA)
What is it?
A development stage biotech company in the young mRNA field. Its COVID-19 vaccine is its only commercial product.

Why is it ESG?
It leads peer pharmaceutical companies in environmental measures. However, it is average-to-lagging in social and governance issues. ESG funds own $49 million of shares.

Why now?
The company made $800 million in 2020, which should explode to more than $19 billion this year as its vaccine is widely used to combat the pandemic. While the company has two-dozen drugs in various development stages, the efficacy of its Covid vaccine is expected to drive significant sales for at least the next two years. After that, the market–and competition–for the vaccine is less clear. Shares have been showing excellent technicals and trade at just 10 times EPS at current prices. Upside target is 277, a confluence of support sits at 190.

Discover Financial Services (DFS)
What is it?
A consumer credit card issuer.

Why is it ESG?
Its environmental practices best financial services peers. Consumer complaints are low. DFS is one of the least-held of the top 200 most widely held ESG stocks by funds.

Why now?
Consumer credit card debt has been cut dramatically in the pandemic, but there are early signs consumers are returning to old habits of carrying monthly balances. That puts credit card issues in a sweet spot–consumers have good credit and healthy finances, but are spending and financing more. Discover seems to be getting traction in getting consumers to open savings/checking accounts, which improve a bank’s financial ledger, by generating interest income that offsets the interest banks pay to extend credit. Charts point to 170 as an upside target; 118, 102, 92 then 84 are the major support levels.

Hubspot Inc (HUBS)
What is it?
A cloud-based marketing and sales platform.

Why is it ESG?
It has excellent employee benefits and engagement and its corporate governance is considered in line with shareholder interests. ESG funds hold $38 million of shares.

Why now?
More funds are buying shares in Hubspot and the company has clear sales momentum based on its latest quarterly results. Shares haven’t seen real selling pressure in more than a year and are trending nicely. With little resistance in the chart, shares project an upside to 800, with support at 572, 480 and 444.

Our Greentech Timer

Mixed signals from Greentech this week, with the benchmark index we prefer to watch, the Wilderhill Clean Energy, surrendering most of the gains it added at the end of June, slipping below its 200-day moving average and testing the 20-day moving average. The less-broad and more weighted to Tesla (TSLA) Nasdaq Clean Edge Green Energy ETF (QCLN) is over its 200-day, however, and solar stocks as represented by the Invesco Solar ETF (TAN) are also holding over their 20-, 40- and 200-day moving averages, all of which are trending higher entering the week. In each case, selling pressure is generally weak compared to recent up-day volume.

Volatility is also decreasing which has the effect of setting Greentech for a breakout up or down at some point. Longer-term charts also suggest positive developments ahead, with the sector at once appearing to be entering a third leg of a bullish Elliott Wave (a type of pattern with five legs to a bullish move, seen by the eye of the beholder and only broadly actionable) and starting its move higher from a chart pattern flag created from last year’s low. Other long-term technicals we watch also say the sector is in an uptrend and has a path to post good gains from here.

However, no chart pattern is going to predict what the next week or so holds for us, so we need to stay cautious and maintain our sell stops.

Our Greentech Timer is fully bullish when the index is above the 20-day and 40-day moving average and those averages are upward trending (ideally, the index is also above an upward trending 200-day moving average too, but not essential). The message here is to be cautious while optimistic. We’re seeing higher highs and higher lows since the May bottom, which is bullish. A move below 86 in the PBW ETF, the chart shown above, would break that pattern and be bearish.

Current Portfolio

Our primary portfolio is the Greentech Real Money Portfolio – we invest alongside subscribers in the picks we make. That portfolio is designed to be fully invested at 12 stocks of equally sized initial investments. This gets us enough opportunities to capitalize on Greentech’s advances without risking too much money in any one position. Always remember sell-stops are essential to long-term success with our approach.

The special opportunities portfolio is Excelsior, which is managed without consideration to the Real Money Portfolio. The current Excelsior portfolio is an evenly divided basket of SPAC warrants. We have no firm sell-stops; use your discretion.

Real Money Portfolio
KraneShares Global Carbon ETF (KRBN)
The European Union is drafting a law that will make the carbon market tighter, add maritime businesses to the cap-and-trade program and toughen rules overall to get free carbon emission credits, including border levies on concrete and steel according to a draft law seen by one news organization. The new law is expected to be released July 14. There is a slight risk changes could include some type of restriction on third parties, like our ETF (though none has been reported), so maintain a sell-stop. We’re raising our sell-stop to near 35.07, which should lock in a 3% profit if things go sideways while leaving us plenty of room for normal volatility. KRBN action looks positive, with some room here for shares to venture toward 44. The area from mid-35 to 35 is initial support. With Tuesday’s sharply down day, however, we’re changing our recommendation from buy. HOLD

Steel Dynamics (STLD)
Wall Street analysts are quite bullish on STLD, with a number of price target increases announced of late. Price action isn’t as bullish and tells us we should be more cautious: Shares closed June below May and April’s closing prices, and STLD is bumping up against resistance at the 20- and 40-day moving averages. The trend is still positive overall. We’re maintaining our sell-stop near 56.97 and our rating at hold. HOLD

Trex Inc (TREX)
The maker of decking from recycled materials is in a news lull, and trading reflects a lack of direction, with shares trawling a range between 93 and 103 in June. Initial support is at 95.60, with the 200-day around 89.50. The trend is positive, and price internals show sentiment more bullish than bearish. We’re maintaining our sell-stop near 93 and our rating at buy. BUY

Excelsior Portfolio
Li-Cycle / Peridot SPAC (PDAC warrant)
Management gave a presentation at a Wedbush “de-SPAC” conference last week and said investors have a misperception that li-ion recycling won’t reach scale until large numbers of EVs reach end of life. However, they said two-thirds of materials will come from manufacturing scrap by li-ion battery makers. There are 211 large battery factories being built worldwide, up from 3 that existed 10 years ago. By 2025, Li-Cycle expects to have capacity to recycle 240,000 tons a year, up from 10,000 right now (at its Rochester, NY facility). Management projects to have contracted revenue of $68 million for 2023, $213 for 2023 and $306 million in 2024, plus estimates of additional uncontracted revenue. Share and warrant price action is bullish.

Navitas Semiconductor / Live Oak II SPAC (LOKB)
Navitas expects the gallium nitride semiconductor market to hit $13 billion by 2026, from about $1.5 billion today. GaN (as the chips are shortened) are much faster and much less energy intensive than silicon chips, which have reached their theoretical maximum potential. That will save CO2 emission by using less electricity. The solar inverter market is expected to be a large one as well for GaN, as an obvious way to boost the cost profile of panels. The company says it doesn’t have the delays silicon chip makers have globally, which is keeping the business on target. GaN has mainly been in mobile device chargers. Now a major LED TV maker will debut sets with GaN chips this autumn. Share and warrant action is range-bound.

Origin Materials (ORGN)
Artius SPAC closed its merger with the zero-carbon plastics maker on June 25. News has been quiet. Share and warrant action is slightly negative, but still range-bound.

Ree / 10X Capital SPAC (VCVC)
SPAC shareholders will vote on the Ree merger July 21. The EV “skateboard” chassis maker expects to deliver its first chassis to automakers in 2022. Shares haven’t done much; warrants are trending slightly better.

ReNew Power / RMG II SPAC (RMGB)
ReNew is said in a news report to be considering buying Morgan Stanley’s stake in Continuum New Energy, an India renewable energy provider with 800 megawatts (MW) of capacity. The company declined to comment. Shares have been flat; warrants are improving.

Volta Charging / Tortoise 2 SPAC (SNPR)
The EV charging company has a quiet week. It filed an amended prospectus for the vote on the merger, but has yet to announce the date of the vote. Shares and warrants are largely flat.

Thank you for being a subscriber. Contact me anytime with questions or comments at brendan@cabot.net. The next issue of SX Greentech Advisor is out Wednesday July 21. Our regular update is next week, on July 14, with any updates as needed before then.

The next Sector Xpress Greentech Advisor issue will be published on July 21, 2021.

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Chief Investment Strategist: Timothy Lutts
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