In a sector, Morgan Stanley stated that offers one of the largest potential possibilities for long-term investment, Wall Street analysts have selected their favorite stock to play a “supercycle” for electric cars and their related infrastructure.
As countries around the world begin to transition to so-called green energy, investors have poured money into electric vehicle (EV) stocks. According to Morgan Stanley, electrification in general is a theme with “rare and compelling” opportunities for investors.
The bank stated in a research note this month that “EV infrastructure, energy transition, grid modernization, storage, and distributed power are converging to drive an Electrification supercycle.” They characterized their stock picks as “a compelling way to play many key themes at once with lower risk,” and they believe the sector has long-term growth potential.
Meanwhile, analysts at asset management firm AllianceBernstein predicted that EV batteries would be worth $654 billion by 2050, up from $24 billion today. JPMorgan also listed a number of auto stocks to play the “Clean Energy Transition” theme.
Morgan Stanley has chosen Eaton, a U.S. company that manufactures a variety of electrical systems and components. It referred to the company as “the best way” to play on the theme of electrical upgrades as grids are modernized and replaced. “The company is 70% electrical, with strong positions in US low and medium voltage electrical gear, which we believe are critical pieces of infrastructure to enable EVs, distributed power, and grid upgrades,” the analysts wrote. The bank has an overabundance of the stock.
Morgan Stanley is also bullish on French cable management company Legrand, which its analysts describe as “a pure play low voltage electrical supplies provider whose products around electricity management in buildings are important as part of the transition.” It also chose Siemens Energy, based in Germany, as an overweight stock due to its involvement in “the overall revamp of the electrical grid.”
In a July 6 research note, Bernstein described the battery storage industry as nascent and “still underestimated by most models.” According to the bank, the amount of energy stored in the industry can grow 70 times between 2020 and 2050, with passenger electric vehicles having the highest demand for batteries during that time period.
According to AllianceBernstein, energy storage capacity for wind and solar power will be the second-highest demand for batteries, followed by commercial vehicles and so-called micro-mobility (electric bicycles and scooters). Its outperform-rated picks include energy storage firm Samsung SDI and Chinese battery manufacturer Amperex Technology.
In a July 5 note, JPMorgan analysts selected stocks for a “European Clean Energy transition basket,” including French auto supplier Valeo, Mercedes manufacturer Daimler, and German firm Volkswagen, whose CEO Herbert Diess said in March that the company wanted to “get close and then overtake” Tesla in EV manufacturing.
Analysts also noted that European automakers and component suppliers in the Stoxx600 index were up 24.6 percent year to date, trailing only banks, which were up 25.6 percent.
In an interview with “Closing Bell,” the portfolio manager and vice president of Oakmark Funds mentioned EOG Resources and Apache-parent APA Corporation as two stocks to own.
“We think both are very attractive stocks, and despite the price increase this year, [they are] really an unpopular area for institutions,” Nygren said.
Energy is the best-performing sector in the S&P 500 this year, up 39.4 percent as of Monday’s close. Real estate comes in second with a gain of 27 percent, followed by financials with a gain of 25.6 percent.
Energy has benefited from a rebound in oil demand following the coronavirus pandemic, which harmed global economies and reduced travel significantly. West Texas Intermediate crude futures are up 76% year to date, with oil settling at $74.10 per barrel on Monday.
While this has benefited oil companies recently, some market observers have questioned how long the rally will last, especially since the industry is still under pressure to reduce carbon emissions due to climate change concerns. This is one of the main reasons why some investors were losing faith in the sector’s ability to generate returns prior to the pandemic.
Nygren believes that fundamental economic factors are driving up the price of oil, which benefits the companies involved in its production.
“Our focus is much more on the long-term supply-demand picture, where demand keeps growing as global GDP grows, which means either supply has to grow or price has to rise, and the industry has simply not spent enough on capital expenditures over the past several years to be able to respond to increased demand,” he said. “As a result, we believe oil prices will rise.”
That is good news for EOG Resources, which is “generally considered the best” of the US exploration and production companies, according to Nygren. The Houston-based company’s stock closed Monday at $83.30 per share, up 67 percent year to date.
“If oil stays at $74 per barrel through 2021, we think they’d earn about $10 per share,” Nygren said. “The stock is worth slightly more than $80. To be at the price it was four years ago, when oil was significantly cheaper, the stock would have to rise 50% from where it is today.”
According to Nygren, APA Corporation has a “similar story” in terms of earnings. “They also have this potentially massive asset in Suriname that is currently not producing any income at all,” he added.
APA Corporation shares have fallen 9.8 percent in the last month, but the stock is still up nearly 44 percent year to date.
Since 1996, Nygren has managed the Oakmark Select Fund, and since 2000, the Oakmark Fund. The Oakmark Select Fund and the Oakmark Fund have both gained around 64 percent in the last year, outperforming the S&P 500, which has gained 37.6 percent in the same time period.