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It takes a lot of batteries to make the EV revolution work.
By Aaron Levitt, InvestorPlace Contributor Dec 15, 2020, 9:52 am EST
If you had to guess what the number-one-selling luxury vehicle has been throughout 2020, what would you say? The answer may be surprising. It’s Tesla’s(NASDAQ:TSLA) Model 3. According to clean energy news agency Clean Technica, the Model 3 has significantly outsold all other small and mmidsize luxury vehicles. In fact, more Model 3’s were sold this year than BMW 2-, 3-, 4- and 5-series cars combined. And that, in turn, helps battery stocks.
The finding underscores how the E.V. market is getting hotter by the second. Consultancy Deloitte now predicts the total global E.V. sales will compound at an annual growth of 29% over the next 10 years. By 2030, we’ll have more than 31.1 million electric vehicles on the road. The trend is undeniable at this point.
And as mentioned, the way for investors to play that growth comes down to batteries.
The common element in all E.V.s is batteries. It doesn’t matter who makes the E.V., it needs a battery for it to function. In order to get to those projections, the sheer number of batteries needed is mind blowing. There’s a clear and apparent long runway for investors to profit off the growing adoption of E.V.’s. By buying the battery stocks, you’re buying the “picks & shovels” of the sector.
With that, the following four battery makers — and a broad fund — offer a chance to cash in as the trend accelerates. They are.
- Sociedad Quimica Y Minera de Chile (NYSE:SQM)
- Albemarle Corporation (NYSE:ALB)
- Panasonic (OTCMKTS:PCRFY)
- RMG Acquisition (NYSE:RMG )
- The Global X Lithium & Battery Tech ETF (NYSEARCA:LIT)
Battery Stocks to Buy: Sociedad Quimica Y Minera de Chile (SQM)
Source: madamF / Shutterstock.com
If batteries are the heart of an electric vehicle, then lithium is the blood. And yes, there are numerous new technologies in the works to power EV’s. But the reality is, lithium-ion batteries are still the go-to for electric vehicles (not to mention, every other electric device out there), and will be so for quite some time.
All of which is great news for Sociedad Quimica Y Minera de Chile.
Safe and stable Chile is home to world’s largest lithium reserves. That happens to be Sociedad Quimica’s stomping ground. In addition to being a miner of various fertilizers and agrichemicals, Sociedad Quimica is the world’s largest producer of raw lithium. During the third quarter alone, the producer managed to mine more than 17,600 metric tons. This was a 40% quarter-over-over increase and shows the voracious appetite for lithium in batteries of all kinds. Better still, is that the miner has remained profitable even during the Covid-19 crisis.
With projects in the works to ramp-up production and cuts costs, Sociedad Quimica predicts it will be able to crank out more than 180,000 and 30,000 metric tons of lithium carbonate and lithium hydroxide by 2023. This will give it an even more dominant leadership position when it comes to the raw ingredients needed for batteries.
For investors, Sociedad Quimica represents a great play on the growth of EV’s and the need for more batteries. The stock isn’t cheap on a forward price-earnings basis, at over 31x. But, rising battery demand and cost controls should help push that valuation down. That could make the stock a long-term buy today.
Albemarle Corporation (ALB)
Investing is all about balancing risk and reward. To that end, Albemarle may be a good alternative to previous mentioned Sociedad Quimica.
Albemarle doesn’t mine lithium, per se. But what it does is turn the raw ingredient into various oxides and chemicals used by battery markers and other manufacturers. It’s the next stage in the value chain when it comes to battery production. The benefit of this niche is that like most rare earth minerals, turning raw lithium into something usable isn’t the best for the environment. So, governments place hefty restrictions on its production. For the firms in the niche, like Albemarle, this creates a near monopoly. And the specialty chemicals maker has used that fact to its advantage.
For the 12 months ending in September, Albemarle managed to pull in more than $3.2 billion in revenues. Better still is that the firm is profitable. Even during the pandemic, Albemarle was able to realize profits of $1.09 per share in profit last quarter. Wall Street analysts had only predicted 78 cents per share. Better cost controls and demand for lithium managed to boost its figures.
Going forward, the firm predicts that it will make around $3.05 billion to $3.15 billionin sales for fiscal 2021. Slight dip from last year, but better than initial estimates from analysts.
But the play in Albemarle is very long term. With demand for batteries rising, the demand for needed lithium oxides is rising as well. And as one of the main producers of such chemicals, Albemarle is poised to win.
Panasonic Corporation (PCRFY)
When it comes to the actual manufacturer of batteries for EVs, the vast bulk of producers are Chinese. Given the status of trade relations between the U.S. and Beijing as well as the push to delist Chinese stocks from U.S. exchanges, betting on anything Chinese is a risky bet. Which is why Panasonic could be a great play.
Tucked within its vast electronics empire is one heck of a battery producer.
Panasonic has been making batteries for EVs for years, and that includes some hefty partnerships with manufacturers like Tesla and Toyota (NYSE:TM). All in all, the Japanese tech giant has north of 20.5 gigawatts worth of annual battery production capacity.
But its best days may be ahead. That’s because Panasonic is on the leading edge of new battery technology.
For starters, the firm is one of the leading researchers of so-called quantum glass batteries. These are a new type of solid-state battery that uses a glass electrolyte and lithium metal electrodes. These batteries should be able to deliver more power, be lighter weight and hold a charge for longer than other battery types. Meanwhile, its new “Biscuit Tin” battery design will feature prominently in every new Tesla soon.
For investors, the name isn’t sexy, but it’s stable. And at a forward P/E of around 14, it’s the cheapest battery player out there.
RMG Acquisition (RMG)
If Panasonic represents a steady-eddie battery play for EVs, then RMG Acquisition represents a speculative bet. RMG is technically a SPAC stock and it’s used its initial capital to buy out Romeo Power Systems.
Romeo falls somewhere in the middle when it comes to the battery value chain. It doesn’t mine lithium, make oxides or even make batteries. But what it does is assemble battery packs for end users. And in this case, it’s specifically focusing on the commercial and long haul trucking segment. To make an EV work, you need clusters of batteries, all wired together and controlled via semiconductors and other gear. And the firm has already secured some big deals with automotive parts maker BorgWarner (NYSE:BWA) and trash-hauler Republic Services (NYSE:RPG).
Numbers-wise, Romeo is pretty impressive. Its deal slide deck points to $544 million in already contracted revenues for the year and it has an additional $2.2 billion in sales under “advanced negotiations.” That’s pretty impressive for a start-up. Moreover, the firm has already completed construction of a 7 GW facility to produce its packs.
As for the stock itself, RMG will eventually change its name and ticker. Given its start-up nature, it’s hard to place a real evaluation on the firm just yet. Shares have more than doubled since the merger announcement. Investors looking here may need to tread carefully. Nonetheless, the stock makes an interesting speculative choice on the future of battery pack production for commercial uses.
The Global X Lithium & Battery Tech ETF (LIT)
Given the wide variety of battery stocks for investors to dabble in, perhaps, the best choice is to go broad. With that focus, investors can really get the best of both worlds — from speculative names to more advanced players.
And that means the Global X Lithium & Battery Tech ETF is a top buy for portfolios.
The Global X ETF is one of the oldest and largest in the sector. With more than $1.5 billion in assets, the fund covers 40 different firms associated with battery technology. This includes miners like Albemarle as well as battery producers such as LG CHEM. Overall, the ETF’s holdings cover a wide range of stocks along the battery value chain. Perhaps the only issue is that more than 43% of the fund’s holdings come from China. That could be a risk given the political climate with Beijing.
As for performance, LIT has been hot. Over the last year, the fund is up over 106% and over the last five years, the ETF has managed to price a top-notch 23% annual return. That’s stellar performance and mirrors the sheer growth and acceptance of EVs.
Expenses for the ETF are low as well — currently at 0.75%, or $75 per every $10,000 invested. Given the specialty nature of the fund, that expenses ratio isn’t too high. In the end, investors looking to make a broad play on battery stocks will be served well in the fund.