Yeah AFR!

https://www.copyright link/markets/equity-markets/novonix-australian-ethical-could-be-in-a-green-stock-bubble-20211202-p59e17

Novonix, Australian Ethical could be in a green stock bubble

A spectacular bust in bubble-like sharemarket valuations threatens to spread after US Federal Reserve chairman Jerome Powell used his testimony before the Senate banking committee to caution investors that his hawkish epiphany over inflation risks means interest rates could rise faster than expected.

The warning triggered a second consecutive bruising session for growth stocks on Wednesday, with US and Australian markets already littered by the carcasses of tech wreck valuations.

The crash, which has also spread across Australia’s buy now, pay later sector, is a cautionary tale street smart investors would do well to acknowledge as other sectors have plenty of room to crater.

Green bubble

In fact, it’s easy to identify another crowded sector built around online communities of retail investors, memes, and support from fee-earning brokers vulnerable to reverse over the next 12 months or beyond.

Green investing and the electric vehicle supply chain are hot today and the extraordinary valuation of a local fund manager deserves some discussion as a textbook example.

On Wednesday, green-focused fund manager Australian Ethical Investments (AEF) told investors it expects to report an ‘underlying’ profit before performance fees of between $5 million and $5.5 million over the first half of FY22. In FY21 the group posted a net profit of $11.1 million.

John McMurdo the CEO of Australian Ethical. The fund manager is now worth more than Platinum Asset Management. James Alcock

The green mania has helped AEF’s valuation rocket 1465 per cent over the past five years to $1.57 billion. In other words it’s a fund manager that trades on around 141 times profits.

To put that in context if emerging markets were still an investment mania and Asia-focused Platinum Asset Management traded on 141 times last year’s profit of $163.3 million shares would sell for $39.22 on a $23 billion valuation today. In reality, they closed at $2.65 on Wednesday on a market cap of $1.55 billion.

According to the market, Platinum is now worth less than AEF. This despite Platinum’s $155.6 million profit sitting around 14 times higher than the $11.1 million delivered by AEF.

It’s not like AEF’s green credentials are helping it grow that quickly either. For the six months to December 31 ‘underlying’ net profit is expected to grow by 8 per cent at the mid-point and as it scales growth will get harder.

Fund managers traditionally trade on modest profit multiples of 12 to 15 times profits as there’s no moat and fee pressure exists from passive funds. Moreover, AEF’s Australian Shares Fund charges retail investors a whopping 1.69 per cent management fee as a proxy green tax and there’s little to stop competitors offering similar products far cheaper. AEF’s investment performance has been generally strong, but history shows it tends to come and go at asset managers.

Worryingly, the green fundie’s valuation seems relatively sane compared to other businesses riding investor mania for electric vehicles and green metals.

This week ASX-listed battery technology business Novonix reached a record-high market cap of $6 billion on revenue of $1.6 million for the quarter ending September 30.

Over the quarter Novonix spent just $906,000 on research and development, with $1.5 million spent on product and operating costs.

Its shares are up 2890 per cent over the past five years and Novonix has issued equity to leave it with $248.8 million cash on hand as at September 30. In August, US group Phillips 66 took a 16 per cent stake via a $US150 million investment for 77.96 million shares. That works out around an FX-adjusted $2.70 per share, versus this week’s peak of $12.25.

There are dozens, or perhaps hundreds of other lithium or green-focused businesses that will rely on positive sentiment and announcements (rather than cashflows) to justify staggering valuations over the next 12 months.

Lake Resources, Liontown Resources, Core Lithium, Arizona Lithium, Sayona Mining and short seller target Vulcan Resources have commonly soared 500 per cent to 1000 per cent over the past 12-24 months thanks to exciting stories, a green premium, and expectations for rising lithium prices.

In reality bubbles often don’t pop, but deflate as momentum reverses and speculators using a mixture of technical signals and guesswork sell shares based on recent trends. Whether the green stocks’ valuations prove justified on fundamentals or a bubble deflates remains to be seen.

Tom writes and comments on markets including tech, crypto, software, small caps, banking, payments, and regulation. He worked in asset management at Bank of New York Mellon and is a member of the CFA Society of the UK as an IMC graduate. Connect with Tom on Twitter. Email Tom at tom.richardson@copyright link