Woke investors became broke investors over the past couple of years.
They incinerated their cash by betting on plant-based foods. They lost even more money by loading up on clean-energy producers.
Why did investments as admirable as these fail to produce even a hint of a decent return? Some people (including many of the folks at my favourite diner) will tell you it’s because they’re all left-lib nonsense.
Personally, I prefer a more nuanced take. To, me the troubles that have befallen socially aware investing in recent years demonstrate why it is difficult to make money by betting on broad trends – even if you happen to be right about those trends.
Plant-based food provides a fine example. While only about 5 to 10 per cent of Canadians and Americans are out-and-out vegetarians, many more are trying to reduce their meat consumption.
A 2020 Gallup survey found 23 per cent of Americans had cut back, at least somewhat, on beef and other animal proteins. Growing concerns about animal welfare and the role of cattle in global warming suggest the slow shift toward plant-based eating in advanced economies will continue.
No doubt this will be a long-term positive for the sector. The problem, though, was that hype ran way ahead of reality when fake-beef innovator Beyond Meat Inc. went public with great fanfare in 2019 and plant-based milk producer Oatly Group AB followed suit in 2021.
Investors reap big returns when the companies they invest in exceed the market’s expectations. However, it is difficult for companies to do that when the market pegs them as world-beaters from Day 1.
In retrospect, the widespread notion that Beyond Meat and Oatly would suddenly convert millions of beef-gobbling, milk-guzzling consumers into enthusiastic vegans was wildly optimistic. Both companies make fine products that appeal to people who want to cut back on animal protein, but their offerings aren’t cheap. Neither are they obviously tastier than their animal-based counterparts.
There was another problem, too. Both companies faced an immediate onslaught of competition. Rivals such as Impossible Foods Inc. challenged Beyond Meat in the market for faux flesh while a host of rival plant-milk producers took aim at Oatly.
The result of vicious competition and less-than-enthusiastic consumers was a stock-market debacle. Since their heyday in 2021, both Beyond Meat and Oatly have lost more than 90 per cent of their market value.
A somewhat similar story has taken place in the clean-energy sector.
There again, the trend toward wokeness is real. According to the International Energy Agency, about US$1.7-trillion was invested in clean energy in 2023, substantially more than the US$1.1-trillion devoted to fossil-fuel energy.
Yet, just as with plant-based food, the returns to investors in clean energy have been dismal.
Consider the unlucky soul who put her money into the iShares Global Clean Energy ETF, an exchange-traded fund that invests in companies that generate power from wind and sun. She would have lost half her money over the past three years.
To add insult to injury, her friend who invested in the iShares Global Energy ETF, which holds mostly big oil and gas producers, would have nearly doubled her money over the same period.
Why the huge discrepancy? Look, again, to expectations. At the start of the period, hopes for clean-energy profits were running sky high while the outlook for fossil fuels was deeply pessimistic. Clean-energy stocks would have had to perform superbly to keep up with the lofty expectations embedded in their share prices.
As it turned out, clean-energy stocks got hit from multiple directions. Cheap Chinese imports flooded the market for solar panels. Meanwhile, rising interest rates hammered wind-power projects that depended on a low cost of capital to finance their massive construction costs. Supply chain disruptions and shifting regulations compounded the challenges.
Investors may want to take away a couple of lessons from the carnage in plant-based food and clean energy.
One is that investing in early-stage markets is difficult. It’s tough for anyone to identify which of many competitors will do best. It’s also hard to gauge how consumers will respond, how technology will shift or how governments will enter the fray.
This brings us to a second point: Valuation matters – a lot. You can be absolutely right about a broad trend but lose money if you pay too much for a piece of it.
Investors may want to ponder these uncomfortable truths as they contemplate the current excitement over AI. The technology is exciting, but it is unclear which companies will dominate. What is obvious is that you are paying a hefty price to guess who the winners will be.
On the flip side, it’s worth looking for bargains among yesterday’s hot stocks. Canada’s own Northland Power Inc., a clean-energy producer, is much cheaper than it was and starting to look attractive, especially if interest rates decline over the year ahead. The same goes for Vestas Wind Systems A/S, a Danish maker of wind turbines.
After the hammering that clean-energy stocks have taken, they are no longer anyone’s darlings. And that bodes well for their future.