The stock market loves narratives. In 2020, it was growth stocks, companies resistant to a pandemic-induced slowdown, and renewable energy. Meme stock mania took over in 2021, as well as an overall stock market rally. 2022 was the year of unexpected inflation, defensive income and value stocks, and a major mega-cap tech sell-off.
And 2023 has been the return of growth, mega-cap tech, artificial intelligence, and the hope that the war on inflation is ending.
No one knows what 2024 will bring, or any year for that matter. Rather than try to predict the future, a better strategy is investing in trends that stand a good chance of playing out over time, not just over the short term.
ON Semiconductor (ON 2.53%) is driving the shift toward advanced driver-assistance systems (ADAS) and electric vehicles (EVs). LanzaTech (LNZA 7.73%) is a play on carbon emissions reduction and the energy transition. The oil and gas industry is ripe with value and income opportunities. And solar energy could be undergoing the beginning of a multi-year rebound. Here's why each theme is worth investing in now.
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The automotive and industrial sectors are critical to ON Semiconductor's growth
Lee Samaha (ON Semiconductor): Management's decision to focus on the automotive and industrial sectors makes sense. While the automotive sector isn't a high-growth industry, the end markets where ON Semiconductor plays definitely are. Within automotive, its intelligent power and sensing solutions are used in ADAS, EV charging, and a host of sensors used on technology-rich EVs.
As such, the company has a significant growth opportunity coming from the shift to EVs and ADAS, as it generates significantly more content per vehicle when compared to traditional internal combustion engine (ICE) vehicles. It's a similar story with its industrial exposure, where it sells into the energy infrastructure, factory automation, and EV charging network sectors.
Management is targeting a compound annual growth rate (CAGR) of 19% in its auto market from 2022-2027 and a 10% CAGR in its industrial market over the same period, with its "other" markets declining by a 4% CAGR.
Management is targeting a 10% to 12% CAGR for overall revenue, but don't expect it to be a smooth ride. The company disappointed the market in late October on its third-quarter earnings call by lowering expectations for full-year revenue on the back of a single automotive customer cutting back on production plans. The stock sold off heavily, though it is now back above its pre-announcement level.
It'll be a bumpy ride, but ON Semiconductor is a very attractive stock for investors who can tolerate some potential volatility.
Interest in curbing carbon could help lift LanzaTech higher in 2024
Scott Levine (LanzaTech): Fossil fuels will still play a pivotal role in our lives in the coming year, but interest in reducing carbon emissions is stepping toward the center stage in 2024 -- and will remain there in the years beyond. According to research from investment management company BlackRock, the proliferation of low carbon energy sources around the world could climb to $4 trillion annually through 2050. It's clear that businesses facilitating the reduction of carbon in our economy -- companies such as LanzaTech, which converts carbon emissions into reusable products -- have a vast opportunity ahead of them.
Forget pilsners and lagers, LanzaTech characterizes itself as a brewer that converts carbon emissions into materials used in end products such as cleaning products, textiles, and sustainable aviation fuel. In fact, LanzaTech pegs its total addressable market at $1 trillion.
While LanzaTech has a sizable opportunity before it, investors should remember -- like with any growth stock -- to be mindful of the company's financials. In 2024, for example, investors should look for green flags from the company, such as continued revenue growth as it ramps up operations at its seven operating facilities and indications from management that additional facilities in its pipeline are advancing toward commercialization.
Additionally, should LanzaTech achieve management's guidance and report breakeven on earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, it will be a strongly encouraging sign that the company can succeed at profiting from its carbon capture endeavors.
There's a nice blend of value, income, and growth from legacy energy and the energy transition
Daniel Foelber (oil and gas and renewable energy stocks): I think all of energy is due for a bounce in 2024. And we are already starting to see it here in 2023.
Some oil and gas stocks recovered nicely in December. But the uptick was a drop in the bucket compared to the scorching rebound of many renewable energy stocks.
There's a good chance that no matter what renewable energy exchange-traded fund (ETF) you track, it is probably up big in December. The First Trust Nasdaq Clean Edge ETF (QCLN 1.78%)was up 17.7% from Dec. 1 to Dec. 19, with the Invesco Solar ETF (TAN 2.46%) up 15.7% and the iShares Global Clean Energy ETF (ICLN 1.15%) up 9%. Such a swift recovery sounds extreme, until you realize that all three ETFs are still down big on the year. The energy sector as a whole, which contains mostly oil and gas stocks, is also down on the year.
The set up for oil and gas in 2024 makes a lot of sense. The sector is inexpensive and could do well even if geopolitical tensions persist. It could also do well if the economy recovers faster than normal, as increased economic activity leads to higher energy usage. And even if oil prices stay where they are, many oil and gas companies have lowered costs and are set up to thrive even at current prices.
Meanwhile, the long-term tailwinds of renewable energy haven't changed. And there's a lot of upside for the renewable industry if interest rates begin moving lower, the cost of capital decreases, and projects can get funding and move along.
The world is going to need more energy. And whether we like it or not, the transportation industry still relies heavily on fossil fuels. Both oil and gas and renewable energy could do well in 2024, but investors should realize that both industries are sensitive to external factors (oil and gas prices and the cost of capital). For that reason, the short-term outlook could change dramatically out of nowhere. If it does, it's important to lean on what both industries provide in times of uncertainty.
Oil and gas stocks tend to sport high yields, while the renewable energy industry has multi-decade upside. Depending on which attribute is more valuable to you, one industry or the other is best suited for your risk tolerance and preferences in 2024 and beyond.
A good place to start with oil and gas is the majors, like ExxonMobil and Chevron, while the three aforementioned renewable ETFs provide a good starting point in that industry.
