The Surprising Case for Shell as a Quality-Growth Stock

By Michael Purtill, CFA, Analyst | September 17, 2025

Some sectors are packed with rapidly growing companies. Energy typically isn’t one of them—but that doesn’t mean some energy companies don’t deserve a place in a quality-growth portfolio.

It may seem like an odd fit at first blush, given that earnings in the Energy sector are notoriously volatile. Commodity prices can swing wildly, which not only affects energy producers’ revenues but also influences how much oil or gas they choose to pump out of the ground. Shell, for example, has exceeded a cash flow return on investment of 5% only once in the past 15 years, and its earnings are projected to remain flat over the next five. Even so, there are compelling reasons to own the stock. Here are a few:

1. Geopolitical risk

Energy production is concentrated in politically unstable regions, and major disruptions can quickly shake global supply. Past shocks, from shipping interruptions in the Strait of Hormuz to sanctions on Russia, offer reminders of how fragile supply can be. These events tend to hit the stocks of long-duration growth companies hardest, as investors discount their distant earnings more heavily. Therefore, holding a large energy company such as Shell helps balance the risk. As a diversified producer, Shell has less direct exposure to any single risky region, and the company benefits when wars or sanctions push oil or gas prices higher, allowing it to sell its global production at elevated prices.

2. Inflation protection

Spikes in inflation also tend to weigh on traditional quality-growth sectors such as Consumer Discretionary or Information Technology, whereas Energy stocks have historically outperformed during those periods. (Of course, higher oil prices are sometimes the very source of the inflation.) Therefore, Energy holdings can provide idiosyncratic benefits during periods of shifting inflation and favorably alter the overall risk profile of a portfolio.

3. Positioning for supply shocks

Demand for energy tends to be steadier than supply, which shifts with new discoveries and reserve depletion. For diversified producers with large reserves, that dynamic can be favorable: when supply increases, they benefit from higher volumes, and when supply tightens, they benefit from higher prices. Shell is also the largest integrated player in energy trading. As a natural consequence of the energy transition, weather volatility, and geopolitical tensions, energy volatility is likely to increase and could remain elevated. Higher volatility increases opportunities for capturing outsized margins from trading, and Shell, with its insight into global energy markets and global footprint, is well-positioned to exploit those opportunities.

4. Investment flexibility, without style compromise

Exposure to the sector can help diversify sources of return. However, many energy companies fail our quality-growth screening due to high financial and operating leverage, which create elevated risks, and a history of financial weakness caused by the cyclicality of their end markets. Shell’s diverse, cost-advantaged portfolio has enabled it to generate more durable cash flows than its rivals. Recent operational momentum is also helping to bolster its financial strength; management is working to cut costs and focus on higher-return assets while selling weaker ones. These measures should improve operating margins and lift cash flow return on investment when commodity prices are favorable.

5. Sustainable growth in LNG

Given the volatile nature of earnings in the sector, forecasts should be taken with a grain of salt. They don’t adequately reflect Shell’s unparalleled scale and expertise in liquefied natural gas (LNG) and the long-term growth opportunity it provides, as coal-dependent economies, particularly in China and Southeast Asia, shift toward cleaner energy. With limited pipeline access and declining domestic gas production across much of Asia, LNG is the most practical lower-carbon fuel available. Global demand for LNG is estimated to rise more than 50% by 2040, and most scenarios point to a global supply shortfall emerging in the 2030s. By 2030, Shell plans to grow its LNG business by 20‒30% and its LNG liquefaction volumes by 25‒30% from 2022 levels. Moreover, with global energy demand set to grow alongside rising populations and living standards, Shell looks well positioned to meet that demand while evolving with the energy transition.

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With Rare Earths, Expect Rare Profits

By Anix Vyas, CFA, Analyst and Portfolio Manager | September 10, 2025

Imagine your life without a television, a cell phone, or a computer. Or cameras. Imagine there aren’t and won’t be any electric vehicles. Or airplanes. Or fiber optics. Such a Thoreau-esque existence may appeal to some, but most people don’t want to live in an unwired cabin in the woods.

The US government has imagined it, all of it, because China holds the key to all those devices and more. A whole host of modern products require very tiny but critical amounts of what are called rare earth elements. They won’t work without these components. Over the past three decades, China has come to dominate the industry that mines and processes these elements. The US wants to change that.

It’s not just industrial competition. Rare earths are a critical chokepoint in accessing the modern world. China recently blocked the export of rare earths to western defense manufacturers, which could hurt the production of everything from bullets to fighter jets. The move was the latest tit-for-tat in the race for global supremacy between the world’s two largest economies. Because of that, the US has called these minerals critical to national security and made reviving a domestic rare-earths industry a priority. This has been a focus in both the current and former administrations.

Companies in the industry have gotten a boost from the attention. In July, the Department of Defense made a US$400 million equity investment in Las Vegas-based MP Materials. MP Materials, which owns the only fully operational rare-earths mine in the country—Mountain Pass in California—has signed contracts with the Department of Defense, General Motors, and Apple to supply magnets that incorporate rare earths. MP Materials’ stock, along with those of other rare earths miners operating in the US such as Lynas Rare Earths and Ramaco Resources, have risen sharply in recent months.

These efforts are an attempt to rebuild an industry that once existed in the US. Thirty years ago, about a third of all mined rare earths came from the US. Amid the globalization of the 1990s and 2000s, as China built up its capacity, the US and other countries ceded the territory. By 2011, China was mining 97% of all rare earths.

China is the leading supplier of ore, and it is also the biggest refiner of that ore. Mining is an industry where scale is paramount, the barriers to entry are high, the capital investments required are large, and the rivalry can be devastating. China’s domination of the industry will not be easy to offset, much less overtake.

Rare Earths Aren’t All That Rare

Despite the name, rare earth elements are not particularly rare. The name stems from when the elements were identified. They were discovered in “rare” oxide-containing minerals from a mine in Ytterby, Sweden. “Earth” comes from a term that was previously used to describe oxides in chemistry. Put them together, you get rare earth elements. But these minerals are found in lots of places, including China, the US, Australia, India, Russia, Brazil, Malaysia, and Vietnam. Significant deposits have been found in California, Wyoming, Alaska, Colorado, Missouri, Idaho, New Mexico, and New York.

There are 17 rare earth elements. Some of them are actually rare; promethium (used in radioisotope batteries), for example, shows up only in uranium ore. But others are fairly common. Cerium (used in catalytic converters) is the 25th most abundant element in Earth’s crust; it is more abundant than copper. There is a classification between heavy and light rare earths; the heavier ones are rarer than the lighter ones. Importantly for China, it has some of the most plentiful deposits of the heavy rare earths, giving it another advantage.

Infographic titled 'Elemental: Uses and origins of rare earth elements' categorizing light, heavy, and other REEs with their symbols, uses, and global sources.

Breaking Up (Ore) Is Hard to Do

Finding the deposits is the first problem. The second, more significant problem, is mining them profitably. Scale is critical in mining—it takes years to invest in and build up the needed capacity, expertise, and people. Add in a national-security imperative and a focus by the world’s two leading superpowers and the field is likely to be even more challenging and combative.

The best way to analyze these dynamics is to employ the Porter Five Forces framework developed by Harvard business professor Michael Porter. This lets us examine the competitive dynamics of an industry and reveals its challenges.

Threat of New Entrants. The barriers to entry in rare earths-mining are high, which is a reason why China has been able to build its dominant position, making it difficult for others to compete. A key barrier to entry in mining is simply the access to ore. Finding it, and finding the kinds of high-grade ore that are less costly to process, is one challenge. Another is that unlike other elements, rare earth elements exist fused to other minerals and must be extracted through a complicated, and expensive, process. These factors make it difficult for new companies to succeed in the industry. This doesn’t mean US companies can’t compete—MP Materials does control the ore body at the Mountain Pass mine and Ramaco has a mine in Wyoming—but it will take a sustained effort and significant capital investments.

Bargaining Power of Buyers. Given China’s dominance of the industry, the bargaining power of buyers, who are wholly reliant upon the product, has been weak. The US government push to revive the industry (the Australian government is also taking strides to boost its domestic industry), however, is likely to strengthen buyer power. As federal agencies and large companies such as Apple and GM negotiate long-term contracts to help keep local, non-China based suppliers of rare earths afloat, these buyers will look to minimize prices. This is a mixed bag for companies in the industry. The effort to boost the industry may succeed, but it also may give buyers more options and stronger bargaining power longer-term. This is an underappreciated risk that could hurt profitability.

Bargaining Power of Suppliers. Processing rare earth elements requires specialized equipment and workers with expertise. This gives the industry’s equipment suppliers bargaining power over mining companies. Labor is also a challenge. Given the long drought in this industry in the US, there is a limited pool of workers with the specific knowledge and skills required for this kind of work. That gives them bargaining power over the companies as well.

Threat of Substitution. This is perhaps the area where the industry is the strongest, for the simple reason that currently there aren’t any alternative materials that easily replace rare earths.

Rivalry. Rivalry has been nonexistent, but may increase given the US government’s determination to rebuild the domestic industry. MP Materials is perhaps the most prominent US company right now, but it is not alone. Ramaco Resources recently released a preliminary economic assessment of its Brook Mine project in Wyoming, suggesting the project has a long-term EBITDA potential of US$143 a share per year, and a project life of more than 40 years. Lynas, an Australian company that trades in Canada, is building a processing plant in Texas. The combination of demand and government support is likely to lead to a situation where just as these companies are trying to build up their businesses, other companies are also sprouting up as well, which could lead to oversupply before any of them reach economies of scale.

The very thing that has some investors excited, therefore, is also a risk: the heavy role of government in the viability of these companies. What is good for the US government may not necessarily be good for minority shareholders. If these companies cannot show durable profit and growth without government support, is this truly a viable industry worth investing in?

There is a tough road ahead for sustainable growth and profitability in this industry, certainly for companies in the US, and even for companies abroad. The leading company in the industry, China Northern Rare Earth, supplied almost three quarters of all China’s rare earths, but its cash flow return on investment last year was only about 5%. In fact, over the past 20 years, its cash flow return on investment has been under 10% most years.

The rarest thing about rare earth elements ultimately may not be the elements themselves but profits and attractive returns for the companies trying to mine them.

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From Pipelines to Profits: Distribution Models and Durable Growth in Industrial Gases

August 13, 2025

In this video, Co-Deputy Director of Research Tim Kubarych and Associate Analyst Safia Williams discuss the resilient economics of industrial gas distribution—from pipeline infrastructure to packaged delivery. They unpack how global players such as Linde and Air Liquide leverage long-term contracts, scale, and innovation to fuel consistent growth across a variety of sectors.

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Over the Barrel: The Complex Task of Decarbonizing the World

June 12, 2024

Fossil fuels are the lifeblood of modern society, used for everything from heating homes to powering cars and planes to generating the electricity that keeps the internet running. Crude oil, natural gas, and coal currently meet about 80% of our energy needs globally, but 75% of carbon dioxide emissions come from finding and burning these fossil fuels. There is a consensus about transitioning away from those sources of energy, given how much they contribute to climate change, but there is not a consensus on how much our reliance upon them can be cut or what will replace them. There does not appear to be one clear replacement and there will likely be multiple pathways to decarbonizing the global economy. To understand our energy future, it is helpful to have a perspective on past efforts to develop new energy sources. In this excerpt from the 2024 Harding Loevner Investor Forum, our analysts offer some perspective on the history of energy transition.

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Out of Our Minds

The Surprising Case for Shell as a Quality-Growth Stock

1. Geopolitical risk

2. Inflation protection

3. Positioning for supply shocks

4. Investment flexibility, without style compromise

5. Sustainable growth in LNG

With Rare Earths, Expect Rare Profits

Rare Earths Aren’t All That Rare

Breaking Up (Ore) Is Hard to Do

From Pipelines to Profits: Distribution Models and Durable Growth in Industrial Gases

Over the Barrel: The Complex Task of Decarbonizing the World

Disclosures