UBS thinks that low carbon economy are the best stocks to look at
As a part of the green energy revolution, hydrogen will play a vital role, and UBS put up a portfolio of companies that are positioned to gain.
According to UBS, the oil and gas industry is a “natural participant” in the hydrogen economy because these companies already have complex energy and chemical operations.
“At the moment, the main consumers of hydrogen are refining and chemical activities. As a result, we are seeing the industry at the forefront of the majority of the large projects currently underway, and we anticipate that this will continue,” the firm said.
Royal Dutch Shell is one of its top picks in the space, with a buy rating from the firm. Exxon and Equinor are also positively exposed to an increase in hydrogen use, despite the firm’s neutral rating on each stock. UBS prefers Phillips 66, which it rates as a buy in the refining sector.
Utility companies face significant consequences as well. According to the firm, the sector is still in the early stages of transition, with projects primarily in the pilot phase. Hydrogen can be used by utilities for long-term power storage, among other things.
UBS recommended NextEra Energy, Entergy, and Sempra Energy as safe bets in the space, and all three stocks have a buy rating.
While the vast majority of research into greener vehicles has focused on battery technology, some companies, including General Motors and Toyota Industries, are exploring the use of hydrogen.
The implications are far-reaching for electrical equipment and multi-industry firms. “We believe that over time, all manufacturers will offer upgrade packages to retrofit the existing installed base. According to the firm, this could be a significant revenue opportunity for the sector.
UBS cited General Electric as an example of a company that is setting the standard. The company has been a leader in wind turbine technology, and some of its turbines have used blended hydrogen fuel.
The firm rates the stock as a buy, and it has a favorable opinion of Emerson.
‘Self-help’ is the key in choosing stock-funds
When asked about the fund’s performance, McWey noted that it’s not only about picking the lowest-priced businesses in their industry, but it’s about recognizing factors that would cause stocks to rise upward.
investment is made up of three different components: the price, the quality, and the fundamental forecasting tradeoff. Even if we are value investors, pricing is just one aspect of value. I believe the relationship comes down to the marriage, balancing all three things.
McWey and his colleagues construct their portfolio using ten-value investing principles, assigning a rating to each stock they examine based on those guidelines. These principles include both quantitative and qualitative measures, such as price relative to cash flow and book value, as well as insider ownership and technical trading patterns.
The Heartland team then searches for value and deep value stocks that fall into one of two catalyst categories: “self-help” stocks or duration calls.
Those self-help stocks are typically discovered by identifying underperforming fundamentals relative to peers that are fixable and believing in the management team, according to McWey. This category contains the vast majority of Heartland’s positions.
“Finding a good self-help story is one of the best opportunities you have in this world,” McWey said.
Advance Auto Parts was one of Heartland’s key holdings that fell into the self-help category, with lower margins than competitors and a new management team taking the reins, according to McWey.
In this case, the strategy appears to be working. The stock is up 22% year to date, outperforming competitors O’Reilly and Autozone.
Heartland looks for beaten-down stocks where other investors expect cash flow to fall off for duration calls. Heartland can then make a contrarian bet that, if successful, will result in a strong, sustained dividend yield and a rising stock price.
Old Republic International, an insurance company, is an example of this strategy in the fund, having gained 33% so far this year. According to McWey, the market underestimated the strength of the company’s title insurance business.
Dividend payments are an important aspect of the fund. Typically, at least 80% of the stocks in the portfolio pay a dividend.
With interest rates and inflation expected to rise in the coming months, McWey believes it is critical for investors to seek out healthy dividend payers rather than just those with a high yield.
“If interest rates rise, high dividend yield stocks — but with companies that are paying out a lot of their earnings and cash flow to get to that dividend yield — those companies are going to be at significant risk of a valuation haircut,” he said, citing heavily regulated utility stocks as dividend payers that could struggle in such an environment.
Although the Heartland fund’s 2020 return of 7.2 percent did not outperform the broader market, it was more than 2 percentage points higher than its benchmark and 4.5 percentage points higher than the Morningstar category average.
McWey attributes his team’s ability to move quickly when the market dropped and more names became value possibilities to their “accumulated knowledge” of a broad range of companies, including those that did not meet the fund’s criteria.
“When something like the Covid shock hits, and suddenly companies that did not fit our 10-step process — that we could not have touched just a few months prior, and frankly a company that we did not think we would get a crack at any time in the near future — lo and behold, something like the Covid market shock comes along, and you can get a crack at value, higher quality, and dee
The Heartland fund also does not make macro bets against individual sectors, even if they appear to be overpriced. McWey stated that ignoring an entire industry due to high price-to-earnings ratios would have resulted in him missing out on some of his biggest winners.
“If you’re having trouble finding many great ideas in a large sector, that could be your cue that the one or two gems should have a larger position in the portfolio,” McWey said. “What we discovered… over time is that some of our best alpha generation and stock selection have actually occurred in sectors and industries where we were not finding a lot of fertile opportunities but were able to find one or two that were differentiated.”
