"Oil prices plunged in March and April, and while it may seem logical to steer clear of the stocks of companies focused on energy efficiency, I am a contrarian in this segment," says Kevin Walenta, portfolio manager of Fidelity® Select Environment and Alternative Energy Portfolio (FSLEX).
Walenta says it’s clear that when crude prices fall, the amount of time it takes for efficiency projects to pay off increases. As a result, there’s less of an incentive for customers to start new work or buy the latest energy-efficient equipment.
That said, due to markedly lower oil prices, Walenta says earnings multiples have come down, giving him opportunities to take advantage of values in the segment.
In managing the fund, Walenta focuses on companies with robust balance sheets and management teams that have demonstrated an ability to execute in both strong and weak environments.
Large fund positions as of April 30 included Trane Technologies (TT), a heating, ventilation, and air conditioning (HVAC) equipment company with differentiated products to help customers save on energy costs.
The fund also held shares of EMCOR Group (EME) and Comfort Systems USA (FIX), both construction and engineering firms that install energy-efficient equipment.
"While these firms may face near-term challenges due to longer payback periods for customers, I believe that once the economy recovers, energy prices turn around, and capital spending increases, they each could be stronger competitors," Walenta says.
Fidelity® Select Environment and Alternative Energy Portfolio held securities mentioned in this article on April 30, 2020. As of this date, Trane Technologies composed 4.34% of fund assets, EMCOR Group composed 2.83% of fund assets, and Comfort Systems USA composed 2.09% of fund assets.
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