Despite the most recent pullback in equity markets, many commentators continue to believe that stocks are significantly overvalued relative to the performance of—and near-term prospects for—the real economy, which is suffering under the weight of record unemployment, lost income and decreased consumer spending due to the ongoing COVID-19 pandemic.
The various explanations that have been offered for the equity markets’ strong performance overall since March—from overly optimistic responses to government and Fed intervention to the notion that, no matter what else happens, the economy will be in better shape six to 12 months from now—are ultimately only speculative, since we won’t have a clear view of fundamental values until we know how the pandemic impacts corporate earnings.
The situation is reminiscent of the late 90s, when no one could offer a convincing explanation for the fact that companies like Pets.com and Webvan were valued at levels that implied they would grow at double-digit rates until the end of time. We all know how that ended.
So does the continued market exuberance have to end in a dot-com-style crash? Not if advisors and investors dig a little further to find attractively valued assets that continue to demonstrate solid fundamentals despite the pandemic. Chief among these are power-producing projects that leverage solar, wind and other green energy sources.
Stable Cash Flows: The Big Fundamental
Maslow’s famous hierarchy of needs does not include electric power, but in 2020, it’s all but impossible to support the needs it does include without electricity. Demand for power, accordingly, has a relatively high floor even in times of economic upheaval—especially when compared to more discretionary spending categories.
In the current crisis, revenues for power-producing facilities have remained stable, even as many municipalities offer consumers a grace period on disconnections. Beyond the persistence of demand for electricity, power producers are also contractually protected from downturns by their agreements with offtakers such as utilities and corporations, which require those offtakers to purchase the power produced by individual facilities regardless of broader economic conditions. These contracts typically run for 20 years or more, and also lock in pricing for producers.
For investors, this means that individual power projects provide a steady stream of income, even during tough economic times. There is no need to speculate on the basis of such assets’ valuations, since they offer the most solid fundamental value driver of all: reliable cashflow.
Low And Predictable Input Costs
On the expense side of the P&L, power projects built on renewable energy sources have a natural advantage when compared to fossil fuel-driven plants: Their primary inputs—typically sunlight or wind—are essentially free, and can be mapped out over time to maintain consistent power production.
Beyond the economic advantages this creates for power producers, solar, wind and other renewable sources offer the added benefit of reducing the cost of energy production for society as a whole by reducing carbon emissions and helping us shift to a more sustainable model to meet our energy needs over the long term.
If there is one thing the COVID-19 pandemic has taught us about “black swan” crises and their impacts on the global economy, it’s that unexpected shocks can still create havoc in fossil fuel markets around the world. The low cost and long-term predictability of inputs like wind and sunshine mean that renewable energy power producers have a built-in leg up in containing expenses when compared to their fossil fuel counterparts.