Stocks that will benefit from Smart grid’s upgrades
According to the American Society of Civil Engineers, the U.S. electrical grid will face a $338 billion investment shortfall by the end of the next decade.
Widespread power outages this year, including two massive events in Texas alone — Hurricane Ida and the severe winter weather that hit the state in February — have drew national attention, and President Joe Biden has emphasized the importance of grid modernization. According to the plan’s fact sheet, the bipartisan infrastructure bill includes $65 billion in spending for the electrical system, which includes transmission line construction as well as research and development funding for “smart grid technologies that deliver flexibility and resilience.”
The proposed and massive infrastructure spending will be required to fundamentally transform the grid from a centralized operation with one-way power flow to an interconnected network with two-way communication. Houses and vehicles will constantly send information back to the utility, providing real-time analysis and even stored power when needed, thanks to on-site power generation.
According to Andrew Little, research analyst at Global X ETFs, the basic idea behind the so-called “smart grid” is communication — not one specific change, but rather an overarching framework that uses the latest technology to make the grid more reliable, efficient, safer, and economical.
Whereas utilities once had a steady supply of coal or gas to meet any sudden surge in demand, intermittent power poses new challenges because it is impossible to rely on constant sun or wind. Monitoring available supply is becoming more difficult as distributed power and storage are integrated into the legacy grid and customers who generate their own power act as providers.
′′[The power grid] still looks, in its DNA, like it did 100 years ago,” said Mark Dyson, an RMI principal in the electricity practice. “There is widespread agreement that we need to reimagine some of the fundamental technology and even the architecture of our power grid to meet the needs of where we see ourselves today.”
Of course, large-scale problems can present opportunities for investors, and rethinking the grid is no exception. Because of the complexity of the electrical system and the many pieces it relies on, companies from various sectors and industries are involved — from the hardware nuts and bolts to the software, wiring, and construction crews that install new equipment.
There are several funds that track the industry as a whole for investors looking for broad exposure to grid remaking, including the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund. The fund, which trades under the ticker GRID, manages approximately $570 million in assets. MicroVision, Johnson Controls, On Semiconductor, and Acuity Brands are all up 19% for 2021, thanks to the strength of names like MicroVision, Johnson Controls, On Semiconductor, and Acuity Brands. Aptiv, Schneider Electric, Johnson Controls, ABB, and Eaton Corporation are among the top holdings.
There’s also the SPDR S&P Kensho Intelligent Structures ETF, which is smaller and manages around $54 million in assets. Evoqua Water Technologies, Carrier Global, Xylem, Badger Meter, and Johnson Controls are among the fund’s top holdings.
Itron is one option for investors looking for more specialized bets. The company provides advanced metering infrastructure, which assists utilities in better understanding consumption practices through a continuous flow of data. Utilities can use this data to improve operational efficiency and grid reliability.
They can also use demand-response systems, which focus on reducing usage to match available supply rather than increasing supply to meet increased demand. A smart thermostat, for example, could raise the room temperature to reduce demand, whereas an electric vehicle could be unplugged and charged at a later time when demand is lower.
Itron’s stock reached an all-time high in March, but has since fallen by more than 30%. Shares fell 26 percent in one day in August after the company missed quarterly estimates due to component constraints, which management expects to continue through 2021 and into 2022.
Despite the decline, Raymond James upgraded the stock from outperform to strong buy. While supply chain bottlenecks may be a short-term headwind, the company said demand is not going away, and it also highlighted strength in the company’s software division.
“Power grid modernization — a component of both climate mitigation and adaptation — is a theme to which Itron is uniquely positioned among U.S.-listed companies,” the firm wrote in a client note. Analysts at Baird are less certain, and the firm downgraded the stock to neutral in August due to the lack of clarity surrounding the supply chain issues. However, the company acknowledged Itron’s leadership position.
“We believe ITRI is the best pure-play smart grid company, and would recommend shares for investors seeking exposure to long-term trends toward efficiency, smart metering, and networking,” analysts led by Ben Kallo wrote in a client note in August.
Smart meters serve as the foundation of a two-way communication network between individual homes, buildings, and other devices and the grid, and can assist with everything from load control to outage notification to shifting consumption in areas with time-of-use pricing.
They’ve been around for more than a decade, but they’re still not in every property in the United States. According to an April study from The Edison Foundation, 107 million smart meters will be installed in the United States by the end of 2020, accounting for roughly three-quarters of all U.S. households. Landis+Gyr, based in Switzerland, is another company involved in smart metering and grid edge solutions.
Then there are the companies that create the hardware and software required to connect renewable energy to the grid. This is accomplished through inverters, which are often referred to as the brains of a solar system because they convert the direct current (DC) from solar modules into alternating current (AC) for the grid. These specialized inverters are manufactured by companies such as SolarEdge and Enphase Energy. Both stocks are down by double digits year to date, owing to widespread weakness in renewable energy stocks. However, research firm KeyBanc recently stated that it expects Enphase to recover.
“We like ENPH’s core microinverters business, where it has a significant market share and is well-positioned to capitalize on growth in the resi solar market in the United States,” the firm said while initiating coverage with an overweight rating on the stock.
For investors who are wary of focusing on a single technology, such as solar, wind, hydrogen, or battery storage, Morgan Stanley suggests focusing on the equipment manufacturers.
“We are confident in the long-term trends surrounding energy transition, but individual technology adoption may occur at a different pace,” the firm stated in a recent client note. “The integral role of electrical equipment in all of these initiatives reduces the risk of inadvertent timing… This is a megatrend in industrial markets, and we anticipate a significant amount of capital chasing it,” the firm added.
Morgan Stanley singled out Hubbell and Eaton Corp. as two specific winners. As more and more aspects of our lives, from cars to commercial buildings, become electric, the firm believes the electrification opportunity will reach $45 billion by 2030.
There are also industrial conglomerates that, seeing the opportunity, offer software-as-a-service. Companies such as Emerson Electric, Honeywell, and Johnson Controls collaborate with utilities on projects such as a building management system, which assists commercial buildings in managing their energy needs.
While there are numerous ways to profit from the evolving grid, Cowen is quick to point out that investors should keep a long-term perspective rather than hoping for quick gains. “We caution investors that this transition in the electric utility network will not occur overnight; it will be a multi-decade process with slow and steady growth,” the firm stated.
Supply chain stocks
According to analysts, these buy-rated stocks are relatively immune to the supply chain issues that are currently plaguing the economy. As the supply chain crunch continues, analysts combed through some of the top Wall Street research to find the best buying opportunities.
Motorola, Steve Madden, Leslie’s, Vizio, and Enphase are among them.
According to Stifel analyst W. Andrew Carter, there are no supply chain concerns for the swimming pool and supplies chain company.
The firm recently initiated coverage of the stock with a buy rating, and one of the main reasons for investors to be bullish is the company’s “unique” supply chain.
“Our forecast suggests that the company’s pricing power, advantageous supply chain, and private brands will enable continued EBITDA margin expansion, with EBITDA increasing by 23 percent over the next two years,” the firm wrote.
Carter stated that the pandemic has accelerated the company’s growth, which shows no signs of slowing.
Carter added that this could make the company an attractive M&A target.
“While we have no knowledge of mergers and acquisitions, we believe Leslie’s supply chain and direct consumer
“The connection would provide significant value to large national retailers who would be able to realize meaningful cost and revenue synergies,” he wrote.
Shares are down nearly 21% this year, but Carter believes the stock is undervalued and represents an excellent buying opportunity.
Steve Madden is a football coach.
Earlier this week, Jefferies analyst Janine Stichter called the company a “supply chain winner with a 30% potential upside.”
The firm upgraded the shoe company’s rating from hold to buy, citing the company’s “best-in-class supply chain,” which Stichter described as “an even bigger asset in an unprecedentedly difficult supply chain environment.”
“While SHOO’s key competitive advantage has long been short lead times and sourcing expertise, we believe this is amplified in the current environment of widespread supply chain bottlenecks,” she added.
Furthermore, according to Stitchter, very few companies have the inventory that Steve Madden does.
“We see this driving greater visibility vs. peers, as well as accelerated share gains due to a relatively better ability to meet demand,” Stitchter said.
Shares are up 4% this month, and the stock’s valuation is also quite attractive, according to the firm.
She wrote, “Shares trade at a discount to history/ many peers.”
Meanwhile, Needham analyst Laura Martin stated this week that the electronics manufacturer has one of the most robust pipelines on Wall Street.
“We expect 4Q21 Active Account adds to be higher than current consensus averages because we believe Vizio has addressed many of the supply chain issues identified as gating factors on its last earnings call,” she said.
Martin recently met with the company’s management and believes this should reassure investors because it gives the company an advantage over competitors.
“The company believes that its 20-year track record with supply chain and retail shelf space relationships will continue to provide a material competitive advantage vs other OS (operating system) competitors, both historical and new,” she wrote.
Martin also claims that Vizio has “leveraged strong relationships with its supply chain and retail shelf space allocations to become the #1 leader in soundbar sales.”
Martin went on to say that Vizio is a safer investment than Roku right now, in part because Vizio is a younger company that will likely learn from and mimic Roku’s profit growth strategy.
Vizio’s stock finished the week up slightly more than 2%.
Leslie’s-Stifel has a Buy rating.
“We believe LESL would provide significant value to national retailers, and that value is likely to increase as the company executes its agenda, providing additional opportunity for the shares…” Leslie’s scale, direct vendor relationships, pricing power, and private brand growth are expected to drive 23 percent EBITDA growth over the same period, allowing for continued margin expansion. While we have no experience with mergers and acquisitions, we believe Leslie’s supply chain and direct consumer connection would be of significant value to large national retailers looking to realize meaningful cost and revenue synergies.
Jefferies has assigned a Buy rating to Motorola Solutions.
“Right now, this company is firing on all cylinders. Furthermore, significant new catalysts are emerging, with Federal stimulus funds beginning to enter MSI’s sales funnel. ……. Is there a safe(r) haven from supply chain issues? The company declined to say how much revenue is being held back by supply chain issues. We believe it is relatively minor, and it is focused on their PCR business. They mentioned that, because of their position in Public Safety, component suppliers prioritize MSI for part deliveries.”
Piper Sandler, Enphase, Overweight rating
“We recently spent some time with ENPH in Fremont, CA. Our main topic of discussion was supply chains and the changing competitive landscape. The near-term outlook remains unchanged, as ENPH anticipates improved supply in 2H′21. The competition in ENPH’s sector is heating up, but we believe the company has the foundation for long-term success…..ENPH remains our favorite solar name.”
Buy rating for Steve Madden- Jefferies
“In an unprecedentedly difficult supply chain environment, SHOO’s best-in-class supply chain and proactive measures to avoid disruption are an even greater asset. We see this resulting in greater visibility vs. peers as well as accelerated share gains due to a relatively better ability to meet demand…..supply SHOO’s chain expertise is more important than ever. While SHOO’s key competitive advantage has long been short lead times and sourcing expertise, we believe this is amplified in the current environment of widespread supply chain bottlenecks.”
Buy recommendation for Vizio-Needham
“We anticipate 4Q21 Active Account adds to be higher than current consensus averages because we believe Vizio has resolved many of the supply chain issues identified as gating factors during its last earnings call. … Vizio has leveraged strong relationships with its supply chain and retail shelf space allocations to become the #1 leader in soundbar sales, which have 2x higher margins than TV revs and a high attach rate to many types of connected TVs (CTVs), not just Vizio TVs. The company believes that its 20-year track record with supply chain and retail shelf space relationships will continue to provide a material competitive advantage over other OS (operating system) competitors, both old and new.”