In an earlier post, I mentioned that JPMorgan (NYSE: JPM) has established a Climate Change Research sub-section within its larger Global Corporate Research (see Banks Focus on Climate Change Investing, October 25th, 2007). As I noted at the time, this research group is producing a steady stream of publicly available reports on the investment issues and opportunities relating to climate change.
Recently curiosity led me to dig around in some of it, looking for something that might be of interest. Low and behold, one of the reports I came across did indeed stand out. Although, a bit dated (released June 27th, 2007), Alternative Energy Strategy: Ways to Play the Renewables Boom, is both interesting and useful.
The report provides JPMorgan’s model alternative energy portfolio and its accompanying commentary. Briefly, the analysis follows several themes:
· Government policy and support is key to the alternative energy boom;
Despite the parallels being communicated by some, the alternative energy sector is fundamentally unlike the tech sector. Growth of the internet was a private sector phenomenon with the successful technologies being those that won hard-fought battles in the commercial marketplace. Whereas alternative energy remains extremely dependent on government policy.
· That being said, the three fundamental factors are improving the commercial potential of key renewable technologies;
Aside from higher oil and electricity prices, these fundamental factors include:
o Technological advances among some types of renewables;
o Economies of scale among some technologies in which technological improvements are slow;
o Efforts to curb climate change.
· The market for alternative energy will be bifurcated, with a few technologies prospering while the remaining technologies underperform the market.
Based on its research, JPMorgan has revised its model portfolio to include 46 stocks in nine different renewable technologies. Recognizing the political and technology risks present in this portion of the energy sector, it says:
“We recommend that investor control the risks of abrupt changes in government policies by focusing on companies with international exposure and on technologies that are close to becoming cost-competitive with fossil fuels on an unsubsidized basis.”
On this basis, the bank identifies its “best bets” as stocks relating to Biofuels, Wind and Solar technologies.
While I highly recommend this report, I do note that JPMorgan does not take sustainability issues into account at all in its commentary and conclusions. As a result, Biofuels, including corn based ethanol make it into their best bets – unjustifiably in my opinion.
