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Renewable Energy Group (REGI)

Our latest stock report subject, Renewable Energy Group, has had a wild ride so far in 2020. Although it produces a cleaner energy than the majority of the industry, it is in its essence still a fuel stock, subject to the whims of the global economy and the available demand to transport goods from place to place across the globe. The global pandemic has sent economies into a tailspin and left expected levels of consumer demand in doubt.

We all saw what happened to the oil price back in March as the coronavirus shut everything down. Oil Futures were down at least 50%, and in the case of expiring contracts were not only worthless but held negative value. Something that had never been seen before. Renewable energies don’t generally fare well when the price of oil drops. It means there is less of an economic incentive for governments and private companies to move away from fossil fuels, despite the environmental benefits.

Renewable Energy Group lost just over 40% as a consequence, plumbing the depths at around $17. But interestingly by early-June, it had outperformed its fellow oil stocks and was back at 2020 highs of $32.58. The lure of renewable energy stocks going forward is irresistible.

However, just overnight the company has issued second-quarter guidance which has sent the share price plummeting again. By session’s end, the stock was down 20.47% to close at $22.73 putting it squarely back in good value territory.

According to the company, the guidance adjustment was partially due to the struggling economy, and partly due to calculation errors. Neither of which exactly instil confidence. But if like me, you expect the pandemic to eventually recede and the economy to pick up again, you’ll want to take advantage of getting into solid stocks when they are beaten down. REGI may have just provided us with such an opportunity.

To give you a background, Renewable Energy Group is a company that will benefit from future moves into the global push for cleaner energy sources. REGI is North America’s largest producer of advanced biofuel. They use their own integrated procurement, distribution, and logistics network to convert natural fats, oils, greases and sugars into biodiesel. This can then be used to power everything from cars, buses and trucks through to planes and trains. It can be used on its own to power diesel engines or it can be mixed with regular diesel to form a blended fuel.

In the past, REGI has relied on government support to help fund its enterprise. The BTC (blenders tax credit) has been applied by the US government since 2010, however, it expires every year or so and must be reinstated by the government of the day. However, in 2018 REGI became self-reliant for the first time – able to turn a profit without reliance on government subsidies. The subsidies are now just a welcome bonus and can be retroactively reinstated which provides a nice cash windfall.

In a welcome boost to the industry Congress recently extended the biomass-diesel tax credit of $1/gallon through to 2022. And we predict that governments will continue to move to decrease reliance on fossil fuels and continue to support companies such as Renewable Energy Group – but it’s good to know that they will continue to go from strength to strength regardless.

Just recently The United Nations International Maritime Organization called on the shipping industry to reduce the amount of noxious sulphuric gases and fine particles that large ships spew into the air causing smog over cities worldwide. In 2014 a report out of China found that one container ship off China’s coast emits as much pollution as 500,000 trucks in a day. Great for anyone with asthma.

By 2020 shipping companies are now expected to reduce the amount of sulphur in their fuel to 0.5%, down from 3.5%. There is both government and public pressure for these companies to comply – and most are setting about doing so well before the deadline. Diesel is, of course, a low sulphur fuel. It is expected that the cost of diesel will rise dramatically once demand increases from these changes. Something that is great news for REGI.

There is a strong likelihood that governments subjected to public pressure will continue to adopt similar policies to produce a cleaner environment and to ward off the effects of climate change. The more governments get on board the bigger Renewable Energy Group’s profits will become. The company is constantly investing in creating new technologies in the search for clean fuel and will be a go-to partner for many of the bigger energy companies in the years ahead.

We like the future of clean energy and we like the chances of Renewable Energy Group recovering faster from the pandemic than oil companies. While jet fuel and gasoline demand have decreased by around 40% during the shutdowns, diesel demand is only down around 20%. There are still endless trucks shipping consumer products around that punters have purchased from the internet.

At the right price, we feel that REGI is another great company to take your stock portfolio into the future. If you can pick the stock up for anything under $20 you are getting a real bargain. As always look for dips at these levels and continue to add if prices fall.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.
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