Earlier this week, one of the largest pension funds in America, the California State Teachers’ Retirement System (CalSTRS) made an announcement that was of particular interest to energy investors. They announced that they would be nearly tripling the amount they have invested, bringing it to around $3.7 Billion. Obviously, that a fund of that size is to step up investment in that sector is good news, but investors should be careful not to read too much into the announcement.
First, let’s look at what they didn’t say. They didn’t, as some coverage of the news has suggested, say that they are divesting themselves of more traditional energy investments. Indeed, Fund CEO Jack Ehnes, in a subsequent interview with NPR, pointed out that two of the fund’s top ten holdings were Exxon Mobil (XOM) and Chevron (CVX) and laid out no plan to sell or even reduce those holdings. I have said before that successful energy investing, like successful investing in general, calls for some diversification. You may feel that renewable energy is the future, but should always keep in mind that that future could be some way away.
Searching through the published holdings of the fund I found that their total invested in the two big oil companies is around $2 Billion. Now obviously that is a substantial sum, but considering that XOM and CVX have a combined market cap of around $650 Billion even if they did divest themselves it would probably have little effect on the share price of either.
That is especially true when you consider that the proposed investment in alternative energy and any necessary adjustments will take place over the next five years, not immediately. That also suggests caution on the other side of this; investing even a couple of billion dollars spread between companies and over five years is not going to cause anything to pop immediately.
What it does do, though, is provide a likely long term backstop for those holding the companies on whom CalSTRS decide to bestow their largesse. For clues as to who that may be, I once again turned to their current holdings. In general the fund looks to be somewhat under-invested in the clean energy space, and that, combined with the political message this announcement sends, may have something to do with why it was made. They do, however, have a significant holding in one well known clean energy related stock, First Solar (FSLR).
I first suggested FSLR as a decent value long term holding in the space back in May. It is up over 10 percent since then which, considering the general late summer slump in U.S. markets and in the energy sector in particular is not too bad. This news, however, would prompt me to add to that position. It would be a logical way for CalSTRS to invest part of that money dedicated to the sector as they are familiar with the company and have already presumably done their due diligence.
Again, I am not looking for a sudden pop here, but the possible presence of a large buyer looking to take advantage of any drop should put a floor on any such move. Rarely for me, would this be a situation where I would not have any pre-set stop loss going into the trade. There is no way of knowing at what level CalSTRS would be a buyer if they are, but just the possibility should be enough to slow any losses. If they do emerge as a buyer, then whatever level that comes at would form a very solid point of support.
In general I am wary of paying too much attention when a fund of any kind publicly declares their intentions. Often they are talking about an investment that is already underway or are making noises for some other reason. In this case, though, the transparency of the fund’s holdings allows for some research and it is obvious that they will be buyers in the clean energy sector in the coming months. That much we do know. That doesn’t mean that investors should sell out of big oil, but it does mean that some of the risk will be removed from a traditionally volatile sector. That alone is reason enough to buy into a stock that the fund already likes.