Buy Hold Sell: 5 stocks riding the red-hot energy sector

It is widely accepted that the world is on a path to a new energy mix. How and when we get there is far less certain, and it presents investors with abundant opportunities. From the materials required to build renewables to fossil fuels facing supply-side issues and alternative fuels sources like uranium – the sector is red hot.

In this episode of Buy Hold Sell, Tom Richardson from Paradice Investment Management and Luke Smith from Ausbil Investment Management give their views on three stocks providing exposure to different energy sources.

We also ask each of our guests to nominate a commodity they think will play an essential role in the energy transition and their preferred stock to get exposure to that commodity. 

You can access the episode by clicking on the player, listening to the podcast or by reading the edited transcript below.

Note this episode was recorded on the 22nd of June 2022

Edited Transcript

James Marlay: Welcome to buy Buy Hold Sell, brought to you by Livewire Markets. My name's James Marlay. And today we're talking about stocks for the energy transition. I think it's becoming widely accepted that we are taking away to a new energy world. How we get there, when we get there, far less certain. So to help us navigate the way that we get to the energy transition, or get through the energy transition, we've got Luke Smith from Ausbil and Tom Richardson from Paradice. Let's talk about a few energy transitions stocks. Luke, I'll start with you. Lithium. Couldn't be hotter. Well, it was hotter. Allkem, one of the bigger producers in the Australian market. Buy, hold or a sell?

Allkem (ASX: AKE)

Luke Smith (BUY): Yeah, it's a buy. Lithium, we strongly disagree with the negative view around lithium. We've seen pricing strength, and demand backdrop is extremely strong and strengthening. Allkem, three growth assets, puts it on par with the majors. It's a buy from us.

James Marlay: Okay. Tom electric vehicles, batteries, everyone's into it. Allkem. Buy, hold or a sell?

Tom Richardson (BUY): It's a buy, absolutely. I wouldn't say it's hot. I would even say that the sector's been very cold. In fact, it's the new sector that people love to hate. But it's absolutely a buy. China is still the biggest buyer in the market, and it looks as though their battery production actually is inflecting up. And so it's not what people expect. And there's a lot of short interest in all these names. They might get caught by the demand strength in China. And maybe prices even go higher, not lower like people are expecting. So it's a buy.

Paladin Energy (ASX: PDN)

James Marlay: Okay. Let's talk about something a little more controversial. Nuclear, a divisive topic. Paladin. Buy hold or a sell?

Tom Richardson (HOLD): I'm going to put it on hold, this one. I think the long-term thematic is good, but the demand pitch is going to take a long time, like it always does with uranium. So the demand inches up to 2025 in our view, and they've got to spend a bit of money to restart their assets. So it's probably just in no man's land for us, and we put it on a hold.

James Marlay: Okay. Goes through massive peaks and troughs, the stocks in the uranium space. Paladin. Buy, hold or a sell?

Luke Smith (HOLD): It's a hold from us as well, but for different reasons from Tom. Our buy in the sector is Boss Energy. We had a strong view on uranium. We've seen the Sprott Uranium Trust significantly tighten up the market from our perspective. Our preference, like I said, is Boss. It's a restart of an existing operation, tier one jurisdiction, fully funded, export permits. That's the buy in the space from our perspective.

Santos (ASX: STO)

James Marlay: Okay. If we move back to the more traditional fossil fuels. Santos, stable Australian company, buy, hold or a sell?

Luke Smith (BUY): It's a buy from us. We're bullish on both oil and gas. Santos, for us, is the preferred way to play that in the Australian space. Has lagged the commodity for some time. From our perspective that'll catch up as they print these cash flow numbers. And look, if the market doesn't reflect that value, I think ultimately the capital management will force the market to take heed to how much cash is being generated by this business.

James Marlay: The backdrop for Santos has been quite exceptional. Buy, hold or a sell?

Tom Richardson (BUY): It's a buy. I 100% agree with Luke. It's remarkable how little this stock has done, with their oil and gas backdrop. And really I think that, to Luke's point, it's just they need to see the cash. We've seen that in resources. They wait to see the cash, and when it gets handed to them the stock's respond. And I think that's inevitable with Santos. As much as development optionality they've got, there's going to be a lot of cash coming back to shareholders and the share price will reflect it.

James Marlay: Okay. Now, I've asked each of our guests to bring along a commodity that they think is going to play an important role in the energy transition, and nominate their preferred stock in that sector. So, Tom, let's start with you. What's the commodity, why is it important? And what's the stock you like to play at?

Lynas Rare Earths (ASX: LYC)

Tom Richardson (BUY): It's rare earths, NDPR, goes into high strength magnets, which is absolutely required for EVs and wind turbines, so it's absolutely an enabler of the energy transition. And Lynas is the best placed company in the world, in our opinion. It has the best asset. China completely dominates the supply chain, and everyone's trying to work out how they can unpick that. And they're in the predominant position and we think the commodity price probably goes higher over the next three years.

James Marlay: Okay. What's your pick, Luke? What's the commodity and what's the stock?

Syrah Resources (ASX: SYR)

Luke Smith(BUY): Firstly, he's good isn't he? A tough man to follow. From our perspective it's graphite. But not all graphite companies are created equal. Why do we like natural graphite at the moment? Its main competitor in the space is synthetic graphite. You've seen energy costs go through the roof. That's limiting output. You've seen petroleum products go through the roof, that feed into the production of synthetic graphite as well. And that's placing upward pressure on pricing within the graphite space. A bit like NDPR, one of those commodities that's a bit more opaque than a lot of these exchange-rated commodities. And so it's lagging in terms of realisation from the market perspective. And then, to my point, not all graphite companies are created equal. Syrah used to be the market darling a number of years ago. From our perspective, created a mine, have approvals, have gone through the approval process in terms of selling into the battery supply chain. That process takes years. They've got a major mine that's producing below nameplate, and ultimately is going to be feeding into this higher price environment, and ultimately we'll continue to see a re-rate of that story, from our perspective.

James Marlay: Well, from what I've heard from our guests today, the energy transition is throwing up opportunities, old school energy sources and energy sources of the future. Hope you got a few ideas out of it today. And remember, if you enjoyed that video, hit Subscribe on the YouTube channel and give the wire a Like.

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