Penn Wealth Publishing

2021.03.21 Penn Wealth Report Vol 9 Issue 02

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10 penn wealth Report voluMe 9 issue 02 21 Mar 2021 Penn Wealth Report Copyright 2021. All Rights Reserved. investment intelligence The push for renewable energy will transform this sleepy sector into a vibrant player full of growth opportunities. Utilities e New Utilities Sector Momentum investors and like-minded portfolio managers (PMs) love to look at the sectors, industries, and individual equities which have traveled fast and furiously higher; they are happy to ride the latter part of the meteor's tail to notch some gains. ey start at the top of the performance chart and work their way down. Deep value and contrarian investors and like- minded PMs take a decidedly different approach. ey look at these three areas—sectors, industries, stocks— starting at the bottom of the performance chart and working their way up. What areas, they ask, have been left in the dust, written off as passé, ignored by inves- tors attracted to the fast action? Adopting the research habits of the latter, it doesn't take much digging to find the two most unloved sec- tors over the past 52 weeks: energy and utilities. While energy has been experiencing a steady recovery on the back of baked-in expectations for a massive economic comeback, utilities have not been so fortunate. ere are a number of reasons we favor the utilities sector this year. First and foremost, we have had our best success by being contrarians: finding the gems that others trampled over in search of quick riches. After all, who would want to own a boring utility company when we could own Virgin Galactic SPCE $44 ? Secondly, the rapid run-up in equities, especially high-flying tech names, is making us nervous. We remember the year 2000 like it was yesterday, and a number of similar events are surfacing. irdly, while inflation will probably force the Fed's hand sooner than most expect, bond yields are still historically low. at fact doesn't change the needs of income-oriented investors, and utilities offer some of the richest payouts in the market. Finally, the sector is about to get a major make- over. According to the US Energy Information Administration, coal and nuclear combined still account for a surprising 43% of America's power sup- ply (natural gas comes in first, at 38%). While nuclear power is considered "clean," both of these sources are essentially among the walking dead, destined for replacement. And their replacements, in aggregate, will reshape the utility landscape in a seismic manner. Are investors missing a simple certitude about regu- lated utilities' role in renewables? One segment of the market which does generate excitement amongst the investment community is renewable energy. It is often mentioned in the same breath as electric vehicles and artificial intelligence with respect to the cutting-edge technology driving us—and our economy—into the future. Right now, just 17% of our power demands, or 680 terawatt-hours (TWh), are generated by renewables—mostly solar, wind, and hydro—but this number could grow to 1,500 TWh per year by the end of the decade. Considering the current demand for electricity in the US is just slightly above 4,000 TWh per year, that would represent an annual growth rate of close to 10%, and a major leap forward for the nascent industry. Currently, most renewable energy companies are independent power producers which sell their generated resources to the regulated utilities, which subsequently sell that electricity to cus- tomers via their monthly utility bill. The utilities sector has been the clear laggard over the past 52 weeks

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