Thematic investing isn’t the easiest way to make money: Not only do you have to get the theme right, but you have to select the right stocks for tapping into that theme.
Bank of America equity strategist Sarbjit Nahal has provided some assistance on the first part: Energy efficiency, he believes, is a “global thematic megatrend.”
As he argued in a research note, changes in global economic growth have only marginal impacts on long-term energy and climate-change trends, which implies that the trend toward efficiency is long-lasting.
Indeed, he states that coal use is set to rise by 21 per cent by 2035, oil demand will rise by 13 per cent and nuclear generation will grow by 58 per cent.
While that might suggest that energy production is a good investment, Mr. Nahal argues that there are investment opportunities in energy efficiency.
“In a fossil fuel and resource-constrained world, energy demand inevitably has to adjust to limited supplies,” he said.
“Barring an outright, long-term economic downturn, we believe that this process needs to occur through a combination of energy efficiency improvements and gradual substitution out of oil and fossil fuels. Both of these can help restrain our growing appetite for energy in the long-term – although we believe that energy efficiency offers the single, greatest prospects among currently available options for cheap and easy energy and cost savings.”
So-called “end use efficiency” – or energy savings from improved efficiency – could hold the greatest promise, given its track record. Mr. Nahal noted that without gains in efficiency over the past 40 years, global energy consumption today would be at least 63 per cent higher.
There are still more efficiencies to be found of course. The International Energy Agency believes that just one-third of the economic potential has been tapped so far.
That’s where the investing theme kicks in: While efficiency can mean nothing more than turning off the lights, the big investing opportunity is with companies that are developing and using technology to get more bang for the buck.
Mr. Nahal identified seven entry points for investors: automobiles, buildings, industrial and integrated plays, information technology, lighting and LEDs, smart grid and energy storage, and transport.
Unfortunately, these seven points encompass 113 global stocks covered by Bank of America. But if you narrow the names to U.S.-listed stocks with “buy” recommendations, and then categorize by entry point, the list becomes considerably more manageable. At the very least, it’s a good source for additional research:
Automobiles: BorgWarner, FleetMatics, Sensata.
Buildings: Owens Corning.
Industrial and Integrated plays: Hexcel Corp.
IT: Analog Devices, EMC, Equinix, Intel, InterXion, Linear Tech, Salesforce.com, Splunk, Teradata, TIBCO, VMware.
Lighting and LEDs: Nothing in the United States, but Seoul Semiconductor in Korea.
Smart Grid: Itron.
Transport: CSX, Union Pacific.