How to invest in lithium stocks

As with any emerging industry, investing in lithium stocks requires a lot of homework. Here are three ways to bet on the industry including several lithium stock picks.

Looking at investing from a macroeconomic view, it’s difficult to find arguments against the future of lithium. In the words of Forbes, “The gas engine made petroleum the world’s biggest commodity. The electric car could do the same for (lithium).”

When Tesla Motors Inc. (NASDAQ:TSLA) unveiled the company’s luxury electric car, the Roadster, it took the rest of the car industry by surprise. Chevy and Nissan had banked on enormous lithium batteries in their respective electric cars (the Volt and the Leaf), while the Roadster linked together thousands of small lithium-ion batteries (not unlike what you’ll find in your laptop). The net effect was lower costs and higher performance.

No matter what the end battery looks like though, most of the world’s top electric vehicles rely on lithium battery technology to store and deliver energy. And the demand for lithium carbonate and lithium metal should climb rapidly alongside demand for electric cars and mobile gadgets with long battery lives.

As with any emerging industry, investing in lithium stocks requires a lot of homework. Here are three ways to bet on the industry:

1) Invest in a lithium ETF. There are currently two lithium-related ETFs that trade on the New York Stock Exchange (see my post ETFs explained in pictures for information on ETFs). The first, Global X Lithium ETF (NYSE:LIT) is a pure-play on lithium stocks. It seeks to replicate the yield of the Solactive Global Lithium Index – an index composed of “companies active in exploration and/or mining of Lithium or the production of Lithium batteries.” Buying shares in LIT is like investing in each of the 20+ companies that comprise the Solactive Global Lithium Index.

The second lithium ETF on the NYSE is the Market Vectors Rare Earth/Strategic Metals ETF (NYSE:REMX). REMX invests in companies engaged in the mining of lithium, but also 48 other rare earth and strategic metals companies. That makes REMX far less of a pure play on lithium, but it does distribute risk across several other elements that are increasingly used in high-tech products including wind turbines and hybrid vehicles.

2) Invest directly in lithium stocks. There are a number of companies that are engaged in the mining and production of lithium. The biggest beyond a doubt, though, is Sociedad Quimica y Minera (NYSE:SQM). Based in Chile, SQM produces nearly 30 percent of the world’s lithium carbonate. The company holds rights to huge swaths of the Salar de Atacama – a Chilean lake bed that’s purported to hold 27 percent of the world’s lithium. Here’s a list of the world’s top five biggest lithium stocks (including SQM) and their stock performance year-to-date:

Stock YTD Gain
Sociedad Quimica y Minera (NYSE:SQM) -19.25%
FMC Corporation (NYSE:FMC) -13.8%
Rockwood Holdings, Inc. (NYSE:ROC) +.64%
GS Yuasa Corporation (TYO:6674) -34.7%
Saft Groupe SA (EPA:SAFT) -28%
Galaxy Resources Limited (ASX:GXY) -56.9%

As you can see, it hasn’t exactly been a banner year for lithium stocks, but that could change quickly if and when the global economic gloom starts to lift (or if we suffer through higher crude oil prices). If that happens, you can expect penny lithium stocks to outperform their larger rivals (see my post Top five penny lithium stocks).

3) Invest in car companies that harness lithium technology. The most promising area in lithium technology is the electric vehicle industry. Several companies in the space stand out including:

  • Tesla Motors Inc. (NASDAQ:TSLA): Manufacturer of the all-electric Tesla Roadster
  • General Motors Company (NYSE:GM): Manufacturer of the hybrid Chevy Volt
  • Nissan Motor Co., Ltd. (PINK:NSANY): Manufacturer of the all-electric Nissan Leaf
  • BYD Company Limited (HKG:1211): Manufacturer of the all-electric E6 (see my post BYD Auto IPO: Is the battered Chinese battery and car maker stock a buy?)

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Will natural gas cars beat out electric vehicles?

Electric vehicles be damned… Honda Motor Co.’s (NYSE:HMC) been quietly ramping up for nationwide U.S. retail sales of its natural gas-powered Civic GX this fall.

Electric vehicles be damned… Honda Motor Co.’s (NYSE:HMC) been quietly ramping up for nationwide U.S. retail sales of its natural gas-powered Civic GX this fall. The car is something of an oddity, toiling away in the shadows of more “press-friendly” electric cars.


Click to see the rather enormous gas tanks in the Civic GX (via PickensPlan.com)

We’ve all heard of the electric Roadster from Tesla Motors Inc. (NASDAQ:TSLA), the Leaf from Nissan Motor Co., Ltd. (PINK:NSANY) and the plug-in hybrid Chevy Volt from General Motors Company (NYSE:GM). How many of us have heard of the Civic GX?

The GX runs on compressed natural gas (CNG) and is currently available at 139 dealerships in 33 states. This fall, Honda hopes to have a revamped model in showrooms across the country. And the timing couldn’t be better. Nationwide, gas prices are hovering around $3.95 a gallon (per GasBuddy). Compare that to natural gas where the cost of a Gasoline Gallon Equivalent (GGE) ranges from $0.88 in Oklahoma to $2.60 in New York.

Despite competing with an ever-growing array of hybrid and electric cars, the GX has still taken the “Greenest Vehicle of the Year” award from the American Council for an Energy-Efficient Economy for eight years running. Best of all, Honda’s currently got a monopoly on the CNG passenger car market.

And that’s led to robust sales for the admittedly small market. Sales this year (at 643) are already three times higher than they were at this point in 2010, per the Los Angeles Times. Pending a steady supply of parts out of Japan, Honda hopes to produce at least 2,000 GX’s this year at a base price of $25,490.

Whether natural gas cars will one day out-number electric vehicles is up for debate, but there are several benefits to CNG cars:

  • Low-cost fuel (ranging from less than $1 to $2.50+ per GGE)
  • Greener power when compared with electric vehicles (as the overwhelming majority of electricity comes from fossil fuel-based power plants)
  • 85+ percent of natural gas is produced domestically

The biggest hurdle to full-scale adoption of natural gas-powered cars is the lack of filling stations. As of January, there were fewer than 1,000 versus 200,000 gasoline stations (per CNBC). The government’s trying to bump up that number via tax incentives and credits.

One of my favorite selling points for CNG vehicles? Individual consumers can also pony up about $6,000 to get a home-based filling station installed that taps into existing natural gas lines (per the Los Angeles Times). If you log enough miles behind the wheel, a CNG almost sounds like a no-brainer.

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Is Ally IPO a buy?

Will the Ally IPO be a buy? Here are three (not necessarily convincing reasons) to be bullish on the stock.

Welcome to the new incarnation of GMAC: Ally Financial, Inc. The storied company was originally founded by General Motors in 1919 as a lending house for car buyers. Nearly a century later, GMAC had expanded into insurance, online banking, and subprime lending.

It was subprime lending, of course, that would eventually knock GMAC Bank to its knees in May of 2008. The Federal government swept in, buying ever-larger chunks of the company until – in December of 2010 – it would become the majority stakeholder. Out of the ashes would rise Ally Financial, a bank holding company that’s announced plans to go public with an IPO in the next several months. Will the Ally IPO be a buy, though? Here are three (not necessarily convincing reasons) to be bullish on the stock:

1) Dollars and cents. Ally’s got a long row to hoe, but at least it’s profitable. As it stands, the company owes the U.S. Government $12.3 billion in funds received from the TARP program. That’s even after Ally’s already repaid $4.9 billion. There are glimmers of hope, though. Early figures estimate the company could raise $5 billion (per Reuters) from an IPO. That figure could grow as Ally’s IPO date nears, too.

While Ally owes the government $12.3 billion, the Treasury holds $5.9 billion in preferred stock. That means Ally actually needs to come up with just $6.4 billion to pay off the government (before any interest Uncle Sam decides to take). Total net revenue at Ally grew 22 percent last year to $7.9 billion. That was good enough $1.1 billion in profits.

2) New car anyone? I like to think of Ally as an extension of the auto industry. The bank, after all, funds 80 percent of all GM dealers and half of GM’s customers, according to the Capitalistpig Hedge Fund‘s managing member Jonathan Hoenig. Indeed, Ally financed 10 percent of all new cars sold in the U.S. last year. As the prospects for the auto industry improve, so too do Ally’s.

3) Diversification. To be successful moving forward, Ally will have to find creative new ways to make money. Mortgage lending rules will be tighter, and fees the bank can impose on its customers will be smaller. It’s clear the company must find new ways to make profits. That might not be as difficult as it sounds. When you’ve got $172 billion in assets, there are a lot of potential directions you can go in. Given Ally’s leadership in online banking and its early foray into subprime lending, the company has shown it’s not afraid of taking risks. If it makes better choices moving forward, this IPO could unlock a new and exciting chapter in the company’s future.

Bears will be bears: The bearish case against Ally is just as powerful as the bullish case, though. Since the company’s prospects are so pervasively intertwined with the fortunes of General Motors Company (NYSE:GM) and Chrysler, headwinds for American automakers mean headwinds for Ally. And gauging by the performance of GM’s stock since its IPO (down 10 percent), it looks like it’ll be a while before investors start jumping on the bandwagon again.

Then, there’s the pesky matter of dealing with regulators. Ally’s mishandling of foreclosures last year could ultimately lead to a multi-billion dollar fine from the government.

While the publicity surrounding Ally’s IPO will make it a tempting daytrade, it doesn’t take much looking to find companies with more intriguing growth profiles. Smaller companies might not have the name recognition of Ally, but they’ve probably got better financials – and that’s what matters in the long run. Until we see more innovation at Ally, there just isn’t a whole lot to get excited about.

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Should I buy Tesla stock? (NASDAQ:TSLA)

Yes, their stock looks overpriced, but here are three reasons why I say still Tesla’s a buy.

At a time when car manufacturers are building boxy-looking electric vehicles that have the sex appeal of a Rubix Cube with its stickers torn off, Tesla Motors, Inc. (NASDAQ:TSLA) makes sleek, lust-worthy, high-end speed demons.

The luxury electric car maker epitomizes a sexy stock with its David-versus-Goliath attitude and tech start-up management style. That’s not to mention the fact that the company’s at the cutting edge of an industry that just might revolutionize the way Americans travel.

Still, I keep teetering back and forth on whether or not I should buy into Tesla. It’s hard to believe the founder of PayPal could decide to take on monolithic heavyweights like General Motors (NYSE:GM), Ford (NYSE:F) and Toyota Motor (NYSE:TM) and actually get in a few punches. There are a raft of start ups to deal with, too (like Warren Buffet’s pick, BYD Auto).

And yet, Tesla seems to be doing everything right. Their designs are strikingly beautiful. Their partnerships have been designed to make them an integral part of the supply chain for larger companies, and they’re attracting capital from the same companies they’re supposed to be competing with. There just might be something to this stock, after all. Indeed, here are three reasons why I say Tesla’s a buy:

1) Innovative technology. Tesla’s batteries are actually groups of batteries. Rather than building one massive unit, they link together thousands of small lithium-ion batteries (much like laptop batteries) in every car. According to the Mercury News, this keeps their costs lower than the larger lithium batteries used in the Nissan Leaf and the Chevy Volt. Lower costs per car means more profits despite what might be a lower sales volume than their competitors will snag. Indeed, Tesla’s battery costs per kilowatt hour are estimated to be a quarter of the cost of equivalent power for the Leaf and the Volt.

2) Great management. Tesla’s co-founder Elon Musk nearly bankrupted himself trying to get Tesla’s first cars to the market. He’s got the proverbial “skin in the game,” and that means he’s going to do everything in his power to see the company succeed. This wouldn’t mean much if Musk didn’t have a track record for creating game-changing companies. He did just that in 1999 when he helped launch PayPal.com. PayPal was acquired by eBay Inc. (NASDAQ:EBAY) for $1.5 billion just two years later.

3) Well-placed partnerships. You’d think Toyota wouldn’t want to give a penny to Tesla, but they’ve actually hired the company to produce the electric components for their upcoming RAV4 electric SUV. Tesla will generate some $60 million in revenue from the deal, and the company will be able to refine their manufacturing process as they turn out the batteries, motors and other components for the RAV4.

This has been part of Musk’s plan from the very start: if Tesla can become not just a manufacturer of EVs, but a electric powertrain supplier for some of the world’s biggest carmakers, it’ll have its fingers in a much larger piece of the pie, and I suspect that will pay off in the end.

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