Increasing demand for energy has prompted this investor to put two high-yielding energy generators on his watch-list.
I have always been intrigued by how investing greats such as Jim Rogers pick winners time and again. What is the secret of his success?
From what I can gather there is no real secret to Rogers' success. But what Jim Rogers is very good at is anticipating future demand for products and services that have yet to be identified. He correctly predicted demand for commodities ahead of the bull run for metals, foresaw the explosive expansion of India's economy, and correctly guessed that China would one day become an important engine of growth for the world.
In fact Rogers once advised investors to identify areas where demand is likely to be strong, and then invest heavily in industries that may satisfy the demand. So, what industries are likely to see unprecedented demand in future years?
As I see it, demand for energy is one area that may grow beyond current levels of supply. Only recently, the Fool.co.uk office was knocked out by a power outage in central London that sent the West End into chaos. It seems that French electricity outfit EDF had to ration supply because of exceptional demand put upon it by energy-hungry air conditioners and refrigerators! And that is why energy companies are on my radar.
Drax
(LSE: DRX)
is the first of two energy companies on my watch list. The company nearly went bust two years ago when its former US owner pulled the plug as energy prices went through the floor. But things are a lot different today for the company that supplies 7% of Britain's energy needs. It owns one of Europe's biggest coal-fire generators, and recently said it has sold almost all of this year's output and two-thirds of next year's, too. At 896p, Drax is valued at 8 times earnings and yields 10%, which is quite attractive.
Another important power generator is British Energy
(LSE: BGY)
, which was one of Britain's most spectacular failures. It collapsed in 2002 when low energy prices underlined its inability to compete in an oversupplied market. It was also highly indebted, which placed it at the mercy of creditors. That said the company, which is an important source of nuclear power generation, is a profitable outfit today. It supplies around a sixth of Britain's electricity. At 735p, shares in British Energy are valued at around 11 times earnings, and the yield is a mouth-watering 11.7%.
For me the recent outage in London's West End highlights the precarious state of the UK's energy supply. Only this month National Grid
(LSE: NG)
issued two power warnings because supply was approaching its safety margin. But thankfully disruptions to electricity supply were eventually avoided.
However, sailing close to the wind is no way for a developed country to be run especially when the gap between winter and summer demand is narrowing. In the past, power generators could bank on lower demand in the summer to carry out essential maintenance. But as current trends in technological progress and innovation continue, total demand by 2100 may be five times greater than what it is now. Demand may even be higher than that judging by the number of air-conditioning units I counted being wheeled out of Costco last week!
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