Long term Buy & Hold investors who bought blue chip stocks 5-10 years ago and saw their stocks in their golden era may be oblivious to the fact that as time progresses, many industries face structural changes including shifts in disruptive technologies that impede their business models and prospects.
Failure to sell at the height of their business potential result in a longer term unfolding of that Nordique give back phase adversely affecting their share price.
And in AGL's case,
“Energy used to be about commodities such as coal and gas,” he says. “It is now all about technology.”
CWN price is now at levels last seen at end 2012, 9 years of zero capital gain if held over that timeframe.
These examples plus others like APX , A2M, AMP, TLS tells us
1) Do not get fixated with buying blue chips and locking up in the bottom drawer for extended period of time without understanding changes impacting the companies
2) Long Term Hold is not equated necessarily with Successful Investing or that Investing must mean Never Sell.
3) Its Not when you buy it that is as Important as When You Sell It.
4) When buying matured stocks , look out for early signs when the business starts to struggle, demonstrate some form of controversy...e.g early signs were all there in AMP and the emergence of disruptive technology that can threaten the company's growth and business.
AGL faces an existential crisis
Winning in the Australian energy market used to be about matching consumers to coal and gas-fired power. AGL Energy shareholders are making the painful discovery it is all about alternative technologies.
Feb 26, 2021 – 7.00pm
When AGL Energy cemented its position as the country’s largest coal-fired power generator with the $1.5 billion purchase of Macquarie Generation in 2014, it marked the beginning of a purple patch for its shareholders.
The company’s market capitalisation soared by about $8.5 billion in the three years after that deal. Along the way AGL shareholders reaped about $1 billion in capital management on top of generous dividend payments.
It has been downhill ever since the stock hit a record high of $26.76 in April 2017.
Today, the $8.5 billion in uplift in the coal-fired golden years has been wiped out. Worse still, the outlook is so bad that one well-respected analyst, Mark Samter from MST Marquee, believes the stock remains overvalued by about $1 billion.
Samter says the carbon-intensive assets on the AGL balance sheet are actually worth less than their $4.2 billion book value.
That is worrying given AGL chief executive Brett Redman is said to be looking at splitting the coal-fired generation assets from AGL’s 4.2 million retail customers. He is getting help on this project from the company’s long-standing banker, Macquarie Capital.
Redman flagged the possible split of AGL’s operations at the half-yearly results earlier this month with the following intriguing statement: “We are assessing our business model and capital structure to maximise shareholder value.”
Attempts to clarify what this actually means were met with vague comments, apart from a commitment from Redman to AGL’s existing strategic direction. Redman’s rebalancing act
It has led some to ask questions such as what is AGL’s purpose? Can it survive in its current form?
Over the past few years Redman has been doing everything in his power to rebalance the company’s portfolio of assets by investing in renewables, carbon-neutral electricity plans, grid-scale solar batteries, telecommunications and electric vehicles.
But it can do nothing about declining electricity prices caused by the explosion in renewable energy coming into the grid during the day, when his coal-fired plants used to make easy profits.
Also, Redman faces threats to his business from the tsunami of investment in grid-scale batteries fuelled by low interest rates.
Unfortunately for Redman, the headwinds facing AGL are not just coming from commercial competitors. He faces the awkward and real threat from government intervention.
Federal government projects such as Snowy Hydro 2 and a possible gas-fired plant in NSW will hit AGL’s profits. The NSW government’s incentives for renewable investment will add to shareholder pain.
The best-case scenario for AGL is that the collapse in electricity prices is cyclical.
In Victoria, the state government’s efforts to shift consumers from gas to other forms of power will eat away at AGL’s profits.
Redman told analysts earlier this month that the company was not blind to the impact technology was having on every aspect of power generation.
“When you think about where customers are heading and what they’re demanding in a product set today, it’s starting to become very different to 10 years ago,” he said.
“When you’re thinking about the role of government policy in our markets today, it’s very different to what it was 10 years ago.
“So, all of these things are taking what was a very clear-cut set of assumptions and responses 10 years ago to an evolving and more complex set of conditions and responses that we’re seeing in front of us today.
“Rather than rush it, we wanted to signal today that we’re not sitting on our hands with our eyes shut and our ears closed to conditions around us.
“But at the same time, we want to be thoughtful and come back with a complex answer to a complex situation at the end of March.” Structural change looms
AGL says its position as one of the lowest-cost generators in the electricity market – thanks to special deals on coal supply – means it is well-placed to navigate a way through the energy transition.
The best-case scenario for AGL is that the collapse in electricity prices is cyclical. Based on this optimistic view the share price will bounce back when electricity prices rise.
But Bruce Robertson, an energy analyst with Institute for Energy Economics and Financial Analysis, says Australia is going through a profound structural change. It is not cyclical.
“Energy used to be about commodities such as coal and gas,” he says. “It is now all about technology.”
He says grid-scale battery use is increasing rapidly, and battery cost deflation is faster than for wind or solar.
This will crunch AGL’s profits and put further downward pressure on the carbon-intensive assets on its balance sheet.
AGL says Australia’s future energy needs will be delivered through a combination of gas, coal-fired power, hydrogen, pumped-hydro, renewables and batteries.
The reality is that AGL’s future will involve further impairments and more profit downgrades irrespective of the new business model.
