Tom Konrad CFA
The best four stocks I’ve found in my six month quest to find the best peak oil investments.
I apologize for being a tease.
Since March, I’ve been writing this series I’ve called “The Best Peak Oil Investments,” but in many cases what I’ve actually done is to warn readers to stay away from particular sectors. This bait-and-switch was compounded for my syndicated readers at Seeking Alpha when their editors decided to re-title the early articles in this series “Peak Oil Investments I’m Putting My Money On.”
If you’ve stuck with the series for the last seven months and twenty-five articles despite the sometimes misleading titles, I’m going to (finally) try to make it up to you. After mentioning over fifty stocks in the course of this series, and dismissing entire sectors, I’ll narrow my stock picks down to the four I like best at current prices.
These stocks are chosen to do well in what I called “The Methadone Economy” in part nine. If oil prices continue to rise, I expect it to take a toll on economic growth and the availability of funding will probably remain tight. I’m looking for companies that have solid balance sheets and can fund investment from internal cash flow. I’ll be looking for positive free cash flow, low debt, and high current ratios.
I’m also looking for companies that typically reduce the use of the personal car, rather than simply making the car more efficient to drive. More efficient vehicles do reduce fuel use per mile, but because of their lower operating costs may encourage driving, and fail to reduce overall fuel use as much as the efficiency number might lead us to believe. I also see problems with most alternative fuels, mainly because there are limits to supply, which should lead to the prices of any widely adopted alternative fuel to track the price of oil.
The stocks I do like are Alternative Transportation stocks such as rail and bus companies, bicycle and e-bike companies, and Smart Transportation companies that combine information technology and pricing schemes to reduce waste in the transportation system by making the markets for travel services more efficient. Unfortunately, I was not able to find any pure-play or nearly pure-play smart transport stocks that meet my financial strength and liquidity criteria. Portable Navigation Device (PND) maker Garmin (GRMN) has the financial strength I’m looking for, but the increasing competition from GPS-enabled smartphones kept the company out of this list, even though I’m personally an avid user of the company’s PNDs.
Top Four Peak Oil Stocks
#1 Advanced Battery Technologies (ABAT) is a Chinese company whose core business in making polymer Lithium-ion batteries. The company recently bought an e-bike manufacturer which uses ABAT’s batteries in its bikes. I consider batteries in general the best way to invest in vehicle electrification, and ABAT’s focus on e-bikes rather than cars also appeals to me. At the recent stock price of $3.47, ABAT trades at a trailing price earnings multiple of 6.7, has an off-the charts current ratio of over 32. Free cash flow has been negative over the last year, but turned positive in the last two quarters, and the company has enough cash on the balance sheet to internally fund operations for many years at current rates. I discuss ABAT in more detail in this article on six electric vehicle and hybrid electric vehicle stocks.
#2 Stagecoach Group (SGC.L) is an operator of rail and bus services in the UK and North America, and it was my favorite of the three mass transit operators I’ve found because of low debt, relatively strong liquidity, and low price/earnings multiple.
#3 Accell Group (ACCEL.AS) is my top pick among bicycle company stocks. Accell has a large stable of brands controlling leading positions in many European bike markets and segments. High gas taxes and dense cities have helped Europe establish a lead in adoption of bikes for commuting and short trips, meaning that Accell has more experience meeting the needs of such riders, who grow in number with oil price rises. Although I also like the business of bike component manufacturer Shimano (SHMDF.PK), Accell currently trades at a much better valuation.
#4 Vossloh AG (VOS.DE) German commuter and high-speed rail supplier Vossloh trades at an inexpensive price/earnings ratio of 11, with decent growth and dividends that are well covered by income and cash flow. You can read more about Vossloh in my recent article on mass transit supplier stocks.
In a recent article, I implied I’d pick my five favorite peak oil investments, not four. When it came to actually picking, I found myself eliminating potential candidates on one criterion or another until I had just four.
However, I do have two honorable mentions. The first is the Powershares Progressive Transport Portfolio (PTRP), which I said “The Powershares Progressive Transport Portfolio (PTRP) is a
good option for investors looking for a one-stop shop of non-oil related stocks that are better prepared to cope with rising oil prices.” One caveat: as some commenters on the original article pointed out, PTRP trades at very low volume, so PTRP is only appropriate for a long term investor and should always be traded using limit orders to minimize price impact.
A second honorable mention is Kandi Technologies (KNDI), which was profiled in a series of guest posts here. Kandi is a profitable but little known Chinese company making electric mini-cars. I bought a small position on the speculation that it might become better known, but I did not want to include it in this list because I consider it much riskier than the somewhat similar ABAT, which is already in the list.
For US based investors like myself, it’s unfortunate (if not surprising) that only one of these companies is listed on a domestic exchange, and that one is a Chinese company. To trade the three European companies, North American investors will need to go through the world trading desk of their broker, and this will involve paying much higher transaction costs. The high transaction costs mean that these stocks should only be purchased as long-term investments to be held for several years. However, that should not be a problem for peak-oil motivated investors, since we already can only be certain that oil prices will rise over the long term; short term price changes are anyone’s guess.
I personally do not yet have a position in any of these stocks because I expect the stock market to continue to decline in the near term. I’m waiting to make my purchases (of a possibly slightly different set of peak oil stocks) at even more attractive valuations.
Even though I’m not buying these stocks today, I find it useful to look back on my stock picks and see how they have performed over time. As I write on September 11th, a $10,000, equally weighted portfolio of these four stocks would contain 720 shares of ABAT, 878 shares of SGC.L, 61 shares of ACCEL.AS, and 24 shares of VOS.DE. Since I’ve come out saying that investing in oil exploration and production companies is not the best way to invest in peak oil, I plan to test my theory by comparing this portfolio in the future to 183 shares of the Energy Select Sector SPDR (XLE), which is composed of oil E&P companies.
[Late note: This article was not published until October 3, at which point the portfolio had risen 5.8%, while XLE was up by 4.0% between writing and publication. While this makes the relative valuation of the companies less attractive, the reasons for choosing them over oil and gas companies are unchanged. I have not yet bought any of them because I’m still expecting a significant market correction, and am waiting for even more attractive prices.]
These are my top oil related picks, but I have to admit I’m as curious as you are as to how they work out. Can you do better? Leave your picks in the comments, and I will track them along with my own when I check back to see how these stocks and XLE are doing.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.