EPA Ruling Spawns Black Market for Refrigerators
- EPA bans popular refrigerant.
- Loophole leads to “black market” for certain refrigeration units.
- Supply shortage and new opportunity are in play.
- Also recommended: What’s the EPA’s stance on new white oil?
In America, the news is dominated by the Trump administration and Russian hackers. Overseas, it’s all about terror attacks and Brexit.
But here’s a major story that’s getting virtually no coverage: a refrigerant shortage.
I’ll bet most people don’t think about their hardworking fridges very much. Unless, of course, they’re not working.
But a global ban on the popular refrigerant R22 is sending its prices through the roof.
And as senior analyst Jonathan Rodriguez notes below, R22’s steep climb means huge profits for this small-cap firm…
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily
Supply Squeeze Puts 8 Million Refrigerators at Risk
The self-contained refrigerator is a modern marvel.
Invented in the early 19th century and mass-produced by Frigidaire in the 1920s, fridges have been keeping food fresh in households and businesses alike for many years.
Now, a refrigerator consists of a storage unit for items to be kept cool, a compressor, condenser coils, a radiator and a fluid refrigerant.
And most of these components and processes have changed very little since inception.
Except for one: the refrigerant.
Fridges have seen a wide range of coolants — from ammonia in the early days, to Freon (R22), to today’s Puron (R410A).
While Freon has been in use for decades as a refrigerant, it is a hydrochlorofluorocarbon (HCFC) — which is known to deplete ozone.
As a result, the EPA has put a phase-down schedule in place that will outlaw the production or import of Freon by 2020. In fact, supply of R22 was halved to 18 million pounds in 2016.
Here’s the thing…
By 2010, shipments were halted for new fridges containing R22.
But some refrigerator companies continued selling fridges with R22 systems for several years after that.
They took advantage of a loophole in EPA rules, which allowed them to sell refrigerators that are R22-ready — only without the refrigerant included.
Consumers just needed to charge the fridge with refrigerant after the purchase.
Of course, these fridges were sold at a much lower price than those conforming to the new environmental standards.
So what does all this mean?
It’s simple, really…
The supply of R22 is declining at a rapid pace. At the same time, demand for R22 will continue to be strong as consumers continue to charge up their refrigerators.
What’s more, these refrigerators and HVAC units have life spans from 10–20 years.
And because no new R22 is allowed to be produced, the only way to retrieve the coolant is to reclaim it from decommissioned fridge units. It’s like a black market for refrigerators!
Indeed, demand has already begun to outpace supply, and the supply crunch has massively driven up the price…
According to data from Refrigerant Solutions Inc., the wholesale price of R22 has nearly tripled since 2015.
The price jump has created a huge opportunity for the companies that reclaim R22.
And I’ve found the perfect play to take action on the trend…
Short Squeeze, Profits Please
Hudson Technologies Inc. (HDSN) is a refrigerant services company based in Pearl River, New York.
With a market share of 25%, Hudson is the nation’s largest refrigerant reclaimer. And sporting a market capitalization of $359 million, it’s also one of the smallest.
If you’re unfamiliar, reclaiming is the process of extracting refrigerant from existing units to EPA specifications — ensuring that none of it escapes into the atmosphere — verifying high-quality product, and reselling it.
The process isn’t cheap or simple. But it’s highly profitable, especially as the price of refrigerant skyrockets.
Over the last three years, Hudson’s annual revenue has jumped 89%, to $105.5 million.
And over the last five years, the company’s earnings have grown 7.6% — more than twice the growth of the industry (3.6%).
In fact, annual earnings per share rose 106%, to $0.31, in 2016 from the previous year. And earnings are expected to grow at an annual pace of nearly 40% over the next two years.
Better still, the company trades at just 17 times forward earnings. That’s an 11% discount to the industry and a 32% discount to the consumer staples sector.
On the company’s surging fundamentals, shares have gained 149% in the last 12 months — seven times the rise of the S&P 600 small-cap index.
It gets better…
Not only does Hudson enjoy little attention from Wall Street because of its small size (only three analysts cover the stock), but the refrigerant shortage overall is also going underreported.
This means early investors have the chance to hop into these shares before the herd catches on to this massive opportunity.
On the hunt,
Senior Analyst, Wall Street Daily