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Two Value Opportunities: Palladium & Utilities

Rareview Macro

Rareview Macro
Visit: Rareview Macro

Earlier this week, House Democrats unveiled their Green New Deal. It is aspirational. We highlight this for a numerous reasons.

New green legislation potentially creates two significant positives for the equity and debt of electric utilities:

  1. The potential for an entire new avenue of spending from electric vehicles.
  1. Increased rate-base spending on wind and solar and the transmission to bring those to market. That would benefit equity holders from higher EPS growth rates and support bondholders by increasing asset coverage because they lock in new 30-year returns on investment.

This week, Tesla (TSLA) technically completed a continuation pattern. Its market cap increased above $200bn for the first time and surpassed Toyota as the world’s most valuable auto company.

The first question is, why is the commodity input that benefits the most from TSLA’s ascent and a potential green new deal – palladium – still trading like there is a pandemic going on? As you can see, palladium is lagging TSLA by ~100% and has not seen a pandemic-related recovery. In fact, last year’s best-performing precious metal posted a fourth straight monthly decline in June, the longest since 2015.

As a reminder, palladium benefited the most from stricter environmental standards – that has NOT changed. At some point, consumers will be able to revisit show rooms and auto sales will bounce. When that happens, palladium will respond faster than you can initiate a position.

Tesla and Palladium

The second question is why have utilities shown no response on a relative basis? Below is the ratio of the Russell 3000 utility sector (RGUSU) relative to the Russell 3000 Index (RAY). Yesterday, the ratio closed at an all-time low.

We expect deep value managers and CFA’s to figure out which companies benefit the most in this sector.

Russel 3000 utilities vs russell 300 index
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