Deep dive: Decarbonisation

James Marlay: Nick, we are seeing a lot of interest in the theme of decarbonisation. Are there any stocks in the portfolio that give you exposure to this?

Nick Healy: We have a few names in the portfolio that will benefit from decarbonisation. I think it is worth pointing out with any hot area, like decarbonisation, our view is that it is best to try to look further afield to take exposure. We have had a timely reminder of this with some of the hotter areas cooling off a bit, and some significant downward stock price movements. One example would be solar where stocks fell over a third. We do not have any exposure in that area.

One way we are playing the name is Quanta Services (NYSE: PWR). Quanta is a specialty contractor to utilities primarily in North America. Quanta was always a very solid business and well managed, but we think it’s about to become significantly higher quality thanks to the tailwinds from decarbonisation. They do a lot of work around US transmission grid modernisation and hardening. Our view is that as electric vehicles and renewable energy rolls out of the coming decade, we are going to see significant spending in this area. That is going to benefit Quantar, not just in 2021, but in the years to come.

Another way we are playing the decarbonisation theme is Volkswagen (ETR: VOW). We have short-term and long-term reasons to like Volkswagen. In the short-term, for anyone that is shopping for a car at the moment would know dealers aren’t very willing to give a lot of price discounts. The reason is there is a global semi-conductor shortage, which has forced the industry into a lot of rationality and they are taking up prices and that is flowing through to margins. Longer term, we believe Volkswagen can be the largest electric vehicle manufacturer in the world and we are starting to see early signs of this with some really successful product launches under the Porsche, Audi and Volkswagen brands, and the power day in March where they set out achievable targets for their electric vehicle transition. Importantly we think Herbert Deiss is the right CEO to get this done, and the stock trades at only seven times price-to-earnings ratio (P/E ratio), with some really great assets like Porsche, Audi and Lamborghini we do not think are getting enough credit in the market. So, we think those are two very interesting ways to play decarbonisation that also fit our process of buying undervalued growth companies.