Sustainable Investing

Kirk Spano

"World's Next Great Investing Columnist" --MarketWatch

Big Trends, Small Trades: The Smart Grid

"Big Trends, Small Trades" will be a regular part of my contribution to FATrader. The simple math here is to identify industry trends in the emerging sustainable economy and make small trades to build long-term positions. 

In several months, I will also introduce a swing and position trading service for sustainable investments. This might sound counterintuitive, but given the volatility people assign to anything that is "changing" their experience with and understanding of the world, we can make that volatility very profitable.

The change from a dumb, analog, fossil fuel, marked by scarcity and full of latency world to a smart, digital, alternative energy, age of plenty and nearly instant world will be the most massive set of changes the world has ever seen.

If we control our emotions and embrace the world that is coming, we will be able to fully secure our financial freedom even as we muddle through proposals, ideas and motivations that will challenge our freedom. Understanding the big trends can help us control our emotions as we navigate the changing world. 

Today, trends in the smart grid. 

What Is The Smart Grid

Let's go straight to the horse's mouth, the U.S. Department of Energy:

"The electrical grid in the United States comprises all of the power plants generating electricity, together with the transmission and distribution lines and systems that bring power to end-use customers. The “grid” also connects the many publicly and privately owned electric utility and power companies in different states and regions of the United States. However, with changes in federal law, regulatory changes, and the aging of the electric power infrastructure as drivers, the grid is changing from a largely patchwork system built to serve the needs of individual electric utility companies to essentially a national interconnected system, accommodating massive transfers of electrical energy among regions of the United States.

The modernization of the grid to accommodate today’s more complex power flows, serve reliability needs, and meet future projected uses is leading to the incorporation of electronic intelligence capabilities for power control purposes and operations monitoring. The “Smart Grid” is the name given to this evolving intelligent electric power network. The U.S. Department of Energy (DOE) describes the Smart Grid as “an intelligent electricity grid—one that uses digital communications technology, information systems, and automation to detect and react to local changes in usage, improve system operating efficiency, and, in turn, reduce operating costs while maintaining high system reliability.”

From their Office of Electricity they discuss the technology this way: 

“Smart grid” technologies are made possible by two-way communication technologies, control systems, and computer processing. These advanced technologies include advanced sensors known as Phasor Measurement Units (PMUs) that allow operators to assess grid stability, advanced digital meters that give consumers better information and automatically report outages, relays that sense and recover from faults in the substation automatically, automated feeder switches that re-route power around problems, and batteries that store excess energy and make it available later to the grid to meet customer demand.   

Here is a quick smart grid video via YouTube. 

Updating the 9200 electric generating units and 600,000 miles of transmission lines across America is a massive project that will take at least through 2030 according to government and utility estimates. It is a vital mission as it touches not only all of our standard of living, but also national security. As this project is worked on, according to it should result in:

  • More efficient transmission of electricity
  • Quicker restoration of electricity after power disturbances
  • Reduced operations and management costs for utilities, and ultimately lower power costs for consumers
  • Reduced peak demand, which will also help lower electricity rates
  • Increased integration of large-scale renewable energy systems
  • Better integration of customer-owner power generation systems, including renewable energy systems
  • Improved security

The essential evolution of the grid is from a one-way system to a two-way system with very complex interoperability. 

There is significant overlap between the smart grid and smart cities. Municipalities must work closely with utilities to keep their vital functions operational. So, as we research the smart grid, we will necessarily find companies that touch on various "smart everything world" concepts. 

Smart Grid Trends

The smart grid is growing by a double digit percentage overall. That growth is accelerating, indicating we are in the early phases. CAGR is in excess of 11%. Communication and wireless infrastructure to support the smart grid is projected to be growing 20% by 2024 to support IoT related to the smart grid. 

According to the Congressional Research Service's "The Smart Grid: Status and Outlook," spending on the smart grid in the United States through 2030 will range between an absolute low of $260 billion to, as much as, $800 billion. I anticipate closer to the high-end of the range. 

Certainly the smart grid will be good for some engineering and construction firms. However, what is growing at faster rates are the AI that support machine learning and the IoT that connects everything. 

Machine learning driven by AI will be a core component of the smart grid. Already about third of utilities use machine learning for metering and data management. 

IoT is another critical component. 55% of utilities use IoT for metering now versus having a person walk up to your meter. The number of connected devices is soaring and by 2030, most of the grid will be hooked up to sensors. For those providing the sensors there is a large amount of ongoing revenue available. 

Smart Grid Stocks To Watch

Here are two smart grid stocks on my watchlist. One is at a long-term buy price right now, the other is closing in.

Itron (ITRI) is a metering company that recently bought and integrated Silver Spring Networks, a company I had been invested in. The company is a leader in measuring, monitoring, analyzing and managing energy and water use. Itron is helping utilities rapidly move towards smart metering practices. Read their most current investor presentation for a primer.

The stock is currently trading only slightly below my estimate of intermediate-term fair value (I seek growth stocks trading at about half or less than what I anticipate their intrinsic value will be 2-4 years out). It is not exhibiting the short-term inward money flow that would cause me to buy the shares. An extreme oversold condition might be developing to give us an entry point though. Using weekly charts, we can see that there is interest in the stock. 

Daily 3-year Itron Chart

Weekly 3-year Itron Chart

Sierra Wireless (SWIR) is one of the leading IoT companies in the world despite their small market cap. The company has recently made a key strategic acquisition to upgrade their software-as-a-service (SaaS) capabilities. They are now focusing on cost reductions through synergies and dropping a growing top line to the bottom line. 

The stock recently fell on high volume that appears to have been a capitulation. The stock has been basing for over two months and money flow has just started to show signs of marginal improvement. I estimate that the stock is now trading below half its intrinsic value one cost controls are realized. I am accumulating the stock slowly in case there is one more shoe to drop.

Weekly 3-year Sierra Wireless Chart

There are far more stocks to consider. These two offer the potential for not only dropping significant revenue to shareholders in the next few years, but are clear takeover targets. 

Kirk Spano covers Sustainable Investing as one of the original contributing analysts at FATRADER. Named the "Next Great Investing Columnist" at MarketWatch, Kirk has been getting the jump on secular trends for over 20 years, and now sees investing in alternative energy, smart grid, EVs, agriculture, healthcare and water as the most likely place to make outsize profits in coming decades.
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