Heat waves are lasting longer and are becoming more intense. It's a trend many scientists expect to continue. Raymond James Managing Director Pavel Molchanov says there are several stocks that could benefit from higher temperatures. Molchanov tells Yahoo Finance Live that "water scarcity is one of the most glaring consequences of the climate crisis." He highlights desalination as a potential solution to shortages, highlighting Energy Recover (ERII). Molchanov also explains why he like Bloom Energey (BE) and Enphase Energy (ENPH).
Video Transcript
JULIE HYMAN: Despite air conditioning units seeing a lot of use this summer, natural gas prices still sit over 60% lower than they were a year ago. But as the world desperately tries to cool off amid scorching temperatures, some stocks may actually stand to benefit. How should investors play this heat wave?
Pavel Molchanov, Raymond James Managing Director, is joining us now. Pavel, it's been a while. It is great to see you. And this is sort of such your wheelhouse. I'm so glad that we have you here to talk about it.
Obviously, there's this heat wave that is across the globe. In particular, in the Southwest US, we are seeing a lot of issues. And you've been looking at some companies that may be poised to help. One of the most intriguing ones, in my mind, has to do with desalination. But talk us through sort of the big-picture thesis there.
PAVEL MOLCHANOV: Yes. Water scarcity is one of the most glaring consequences of the climate crisis. Literally, parts of the world are running out of water. Now, our listeners in California have a long history of this.
But as bad as California has been in this regard, the situation is even worse in much of the Middle East, India, other parts of Asia where you have high population density and nowhere near enough supply from aquifers and rainfall. So desalination is a vital aspect of what we call climate adaptation, learning to live with systemically higher temperatures. Energy recovery-- yeah.
JULIE HYMAN: Go ahead. No, go ahead. Finish your thought.
PAVEL MOLCHANOV: Energy Recovery, or ERII, is the only publicly traded company that is nearly 100% focused on desalination. This company provides equipment to desalination plants that makes them more efficient and ultimately reduces the cost of desalinated water, makes it more affordable. So historically, you know, most of this company's revenue came from the Middle East, where desalination is the most common, right, places like Qatar and the UAE, but increasingly, they are selling to parts of the US, China, India, and so on.
JULIE HYMAN: And, Pavel, really quickly for our-- we have both an investor audience and a retail investor audience. Can you explain what desalination is?
PAVEL MOLCHANOV: Desalination means taking water from the ocean, removing the salt. This takes a lot of energy, right? Water goes through these membranes, salt is removed, and the result is potable water suitable for drinking, cooking, everything else.
Only about 2% of the world's water supply is desalinated today. But that percentage will only go up over time because the climate crisis is making water shortages more common and more severe.
JULIE HYMAN: And, Pavel, so not only is it complicated to do. It is also expensive to do. So when you talk about it being most common in the Middle East, that's not just because there is a need there, but there's also probably the financial resources there to pay for this costly process. So how big a market is there realistically? And is the price coming down, especially when there's only one pure-play publicly traded company that does this?
PAVEL MOLCHANOV: Well, to clarify, the desalination projects themselves, you know, these billion-dollar plants, are built by, you know, utilities, you know, a lot of them government owned, you know, places like Saudi Arabia. So Energy Recovery does not build the project. They provide some of the important equipment used in those projects.
You know, and in fairness, there are some large industrial companies that are involved in desalination, but it's just a very small part of their business overall. Is desalination expensive? Yes, it will always be more expensive than getting water from rain or from underground aquifers, right?
It costs a lot of money, takes a lot of energy to break the water molecule and remove the salt. But here's the reality. In a world of more intense heat waves, as we are seeing right now, and the water scarcity that results, there is no choice. Communities that are literally running out of water have absolutely no choice but to build these projects.
Some of you may remember what happened in Cape Town, South Africa in 2018, the so-called Day Zero, when there was a fear that this, you know, massive city would literally have zero water available for the general population. Well, imagine that scenario spread across, you know, large parts of Asia, South America, and yes, also in the United States. It is only a matter of time.
DIANE KING HALL: What other companies-- so we talk about a pure play there-- are positioned well with what we're seeing in terms of this increasing-- just a hotter Earth in general? We're having these climate change issues, whether we're talking about the US to Europe, melting people, melting phones apparently as well. So what other companies that are not so much the pure plays that are positioned well for this?
PAVEL MOLCHANOV: Just let's think about the energy aspect of this. Heat waves makes the electric grid less reliable, right? We're all living through these power outages, some of them obviously taking longer than others. Bloom Energy, or BE, provides fuel cells for data centers, hospitals, office buildings.
Any kind of business that needs super reliable electricity 24 hours a day, 7 days a week, Bloom's fuel cells protect these businesses from disruptions to the electric grid. This is what we call distributed generation. Instead of needing to rely on the local utility, you put these fuel cells at the site of the business, and they will get completely reliable, dependable electricity without any risk that the local, you know, weather or situation will disrupt the grid.
JULIE HYMAN: I'm curious about Bloom in particular because the shares, well, they're kind of all over the place, aren't they, Pavel? And they're down for the year to date. You know, is it just because-- or at least is it due, in part, to the idea that investors are not as focused on sort of the long-term solutions?
PAVEL MOLCHANOV: Well, you know, look. Bloom is a small-cap stock. It's high beta, you know, not yet profitable, I should say. So in a time of, you know, focus on the more high visibility, maybe higher, you know, larger cap companies, yeah, the stock is down indeed. You know, that's why I think there is a buying opportunity here.
But, you know, conceptually, it is exactly the events like what we're living through right now, you know, this intense worsening climate crisis, that reminds us energy resilience for both the individuals, you know, households, as well as for businesses is an absolute must. People cannot live without water, OK? We all get that.
People cannot live without electricity, at least not for a long time. So protecting businesses from disruptions to the grid, that is exactly what Bloom is all about.
DIANE KING HALL: What other businesses are you worried about in the context of this increasingly hot atmosphere that we're living in?
PAVEL MOLCHANOV: Right. So, you know, again, kind of along the same theme of protecting all of us from the grid shutting down, let's think about the consumer, right, the individual household. Best way to protect all of us as individuals is rooftop solar, putting a solar system on the rooftop. Only 5% of American homes have a solar system.
Now, in Germany, it's 20%. Europe is, you know, quite a bit ahead. Of course, Europe has also learned the hard way during the war that natural gas from Russia is subject to being, you know, cut off for political reasons. So that's part of the reason why Europe is ahead.
But Enphase Energy, ENPH-- you know, this is an S&P 500 company, by the way-- it gets about 1/4 of its revenue from Europe, the rest, you know, from the US. This stock also has not run away from you, by the way, but it is an S&P 500, $20-plus-billion company. This company makes the microinverter, which is an important part of these rooftop solar solutions.
JULIE HYMAN: All right.
