When gathering a list of the Best Energy Stocks for 2021, the choices are really a matter of worldview, as well as an investment style.
If your worldview is grounded in 2020 with an eye toward the future then Exxon Mobil (XOM) - Get Report should be the best energy stock for 2021. It's ridiculously cheap, recently trading at 18x the 2022 consensus earnings estimate and yielding an astronomical 8.0%.
Don't overthink it. If you want exposure to today's global energy industry, which is based on the incredibly efficient combustion of hydrocarbons, Exxon is your play. My honorable mentions in terms of traditional energy plays are other major integrated oils Chevron (CVX) - Get Report, Total (TOT) - Get Report, Royal Dutch Shell (RDS.A) - Get Report and BP (BP) - Get Report.
Of course, we live in a world with multiple modalities. There will be different ways of moving around the planet as we move through the next decade, and there is a global effort to de-carbonize. So, as stocks are forward-looking discounting mechanisms by nature, sometimes an investor must wear the tinfoil hat and try to predict the future.
Technology is going to bring us into a world in the second half of this century that is much, much less dependent on carbon. I am no chemist, but a little basic knowledge helps here. Hydrogen is the most abundant element in the universe, and its potential as a fuel source is thus nearly unlimited. Natural gas, which in pure methane form is CH4, is a great source of hydrogen, but that lone carbon atom can be an obstruction for the greenest of leaders, who like to oppose "fracking" despite not even having a rudimentary knowledge of the process.
But if you still want hydrogen without carbon, you would have to look away from methane. Water obviously has two hydrogen atoms along with an easily (although expensively) separable oxygen atom, we need water to drink. Let's leave electrolysis to the aestheticians of the world and go after a compound that is hydrogen-rich, without containing any carbon atoms.
It's ammonia. NH3, baby. That's a robust source of hydrogen and also a natural byproduct of the production of many industrial chemicals, notably fertilizers.
Just like oil, ammonia can be shipped long distances, and its seeming omnipresence makes it a great feedstock for a global hydrogen economy. Hydrogen fuel-cells are a terrific source of power for mobile applications and are perfect for use in buses and heavy trucks. It's a little more complicated to get H2 into a cheap enough form to power passenger vehicles, but that is being done successfully by Toyota (TM) - Get Report and could have been done successfully by others if they weren't ethically challenged.
Hydrogen fuel cells make so much more sense in a world where we are working together to "green" the energy grid to produce sustainable power, as opposed to moving people off the grid and storing power in batteries like the Heat Miser (sorry, Elon.)
So, how to play a move toward a global hydrogen economy? My best pick for 2021 is not a fuel cell specialist such as Plug Power (PLUG) - Get Report or Ballard Power Systems (BLDP) - Get Report, but a stock that has not been as red-hot as the H2 fuel-cell plays, but still a strong performer: Air Products and Chemicals. (APD) - Get Report.
APD has the size and scale to pull off massive H2 projects like the one it recently announced in Saudi Arabia with NEOM and ACWA Power AND it also produces attractive returns on its capital TODAY.
I recently ran an ROE (return on equity) analysis of Tesla (TSLA) - Get Report, and found Elon's group to have produced a nine-month ROE in 2020 of a paltry 2.3%, more than 100% of which was generated by selling tax credits to other OEMs. Air Products, on the other hand, has averaged a 16% ROE in the first three periods of 2020.
So, that's how grownups invest while the kids speculate using Robinhood and other apps. APD is not dirt cheap, trading at about 26 times fiscal 2022 (September) consensus EPS of $10.23 -- which represents strong growth from the FY 21 estimate of $9.21 -- and APD is no hidden gem, with a 15% stock price gain thus far in 2020 and a dividend yield of 2.0%.
But that's where we're heading. Air Products' superior returns and growth make this a good stock to own for the long-term. Thus, picking a "dirt cheap" entry point is less important than earning an attractive return on your equity from Day One.
The world is changing, but generating a return on capital in excess of the cost of that capital will never go out of style. It is producing feedstocks for a different form of energy than most "energy stocks," but that adds to the story, not detracts from it. For those reasons, APD is my pick for BEST Energy Stock of 2021.
Jim Collins is a regular contributor to Real Money, TheStreet’s premium site. Click here to learn more and get great columns, commentary and trade ideas from Jim Cramer, Helene Meisler and Jim “Rev Shark” DePorre.
At the time of publication, Collins' firm was long APD and XOM and short TSLA.