Don't be First Aboard the Hindenburg
What Hydrogen Can Teach You about Avoiding Over-Hyped Investment Opportunities
As two of my earlier Substack posts have shown, Russia’s invasion of Ukraine has shaken up the global energy market in immediate and potentially profound long term ways.
You are likely accustomed by now to being morally and maybe even publicly shamed for using dirty fossil fuels which pollute the environment. Well, now get ready to feel even more shamed because those fuels might also come from the warmongering country of Russia.
Don’t you even think about driving to buy groceries today!
Regardless of how much those moral arguments resonate with you, it is undeniable that fossil fuels still form the bedrock of our modern societies.
But at the same time, it is also clear that countries and conventional power companies alike are now making major moves towards renewable energy.
The trend has been there. Russia’s invasion may have sped it up.
Unsurprisingly, investment analysts from a variety of outlets have recently been ramping up the hype around all manner of renewable and alternative energy sources, including hydrogen.
So how should you respond when a Morgan Stanley analyst and Motley Fool guest contributor write that they expect, “Plug Power (NYSE: PLUG) stock to more than double in value as global interest in green hydrogen continues to gather steam.”
Is that a green light to invest?
Sounds pretty good, right?
Here is where you need to take a closer look at the company’s performance.
To be fair, it’s not all hype. The company has some promising ventures, including one announced late in 2021 with South Korea’s Edison Motors to produce hydrogen-powered buses.
But at the same time, Plug Power has been bleeding massive amounts of cash. It also projects negative free cash flow in 2021 of nearly $700 million, and almost $1 billion for 2022.
And Plug shares currently trade at roughly one-third their January 2021 peak.
Bottom line: The best decision investors could have made in 2021 on so-called pure play fuel cell/hydrogen stocks was to avoid them entirely.
Like makers of solar panels and batteries, these companies are basically in a race to the bottom to increase efficiency of processes and reduce costs. The winners will reap the spoils of a massive new market.
But there’s no guarantee any of the stocks investors are now betting on will survive to see it. That includes Plug Power.
Don’t look for ETFs to cut risk either. The number available has grown along with hydrogen hype. The Defiance Next Gen H2 ETF (NYSE: HDRO)) has about $66 million in net asset value. Global X Hydrogen ETF (NYSE: HYDR) is a bit smaller at $27 million. And Direxion Hydrogen ETF (NYSE: HJEN) has $44 million.
Collectively, they were down an average of about 20 percent in 2021.
The Direxion fund is heavy on Asian companies, while the other two focus on the US and Europe. But the primary differentiator of performance appears to be when they were launched—as what they hold was a continual decline in 2021.
Fortunately, there’s a much lower-risk way to bet on hydrogen.
In fact, the most promising players already have secure and growing earnings, and many pay generous and growing dividends as well. Basically, they’re the same companies that today dominate “conventional” energy now.
At the top of the list are the super major oils, which today are deploying windfall profits from oil and gas sales to launch hydrogen and carbon capture development.
Also up there are leading utilities and electricity generators. They’ll enjoy a massive potential new source of contracted and/or regulated power sales, magnified by the fact that energy needed for electrolysis is much greater than what’s in the hydrogen produced.
Not only do these companies have the scale and financial power to dominate hydrogen as they have energy in general the past century plus. But if the hydrogen dream is again derailed by inability to bring down costs enough, they’ll still prosper and reward investors with rising share prices and dividends.
That’s having your cake and eating it too, and without the risk of it being taken away by myriad factors that affect the earnings-less like Plug.
By all means, get excited about the future of hydrogen. I sure am!
Just remember to separate that excitement from the rational analysis you need in order to decide where to invest and when.
Don’t be first aboard the Hindenburg.