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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Be like Buffet: How to invest in BYD Auto

What was once an obscure Chinese battery making company, BYD Co Ltd. (PINK:BYDDF) has morphed into one of the world’s largest manufacturers of cellphone batteries and an automotive powerhouse that’s building electric vehicles to compete with Toyota (TM) and Tesla (TSLA).

BYD Auto E6 Electric Car

You might not of heard of BYD Auto yet, but my guess is you will by 2012. What was once an obscure Chinese battery making company, BYD Co Ltd. (PINK:BYDDF) has morphed into one of the world’s largest manufacturers of cellphone batteries and an automotive powerhouse that’s competing with Toyota Motor Corporation (NYSE:TM), Volkswagen AG (PINK:VLKAY) and Tesla Motors Inc. (NASDAQ:TSLA).

The Oracle of Omaha himself Warren Buffet was so impressed by the company’s CEO Wang Chuan-Fu that he broke several of his cardinal rules of investing (i.e. “invest in a business that even a fool can run, because someday a fool will”) when he dumped $230 million into the company in 2008. That entitled Buffet’s Berkshire Hathaway Inc. (NYSE:BRK.B) to a 10 percent stake in BYD.

BYD’s leap from a cellphone battery maker to a hybrid/electric car manufacturer is about as unlikely as Buffet investing in a Chinese business that he doesn’t understand. It seems to be working out for both parties, though. In 2003, BYD bought what CNN calls a “Chinese state-owned car company that was all but defunct,” and within five years the company was manufacturing the F3 – China’s bestselling sedan in 2009.

Now, BYD plans to start selling electric cars in the U.S. during the first quarter of 2012. Their first model? The boxy e6, which will retail somewhere around $42,000. The all-electric car has a range of more than 185 miles and a top speed of 87 MPH. It will hit showrooms around the same time as Tesla’s Model S sedan, which will retail at $57,400. Admittedly, the e6 isn’t as sexy or as fast as the Model S, but it’ll do the same job for less money – and that’ll likely appeal to the green folks who are drawn to electric cars in the first place.

If you plan to buy stock in BYD Auto, I’d recommend doing before the press starts picking up on the company this fall. Here are three ways to invest in BYD:

1) Buy BYD shares directly on the Hong Kong Stock Exchange. The stock’s Listed as BYD Company Limited (HKG:1211).

2) Buy BYD Auto shares over the counter. BYD Company Limited trades on the Pink Sheets under ticker BYDDF.

3) Invest in an ETF or ETN that counts BYD Auto among its holdings. The Guggenheim China Technology ETF (NYSE:CQQQ) currently lists BYD Auto among its Top 10 holdings with 3.71 percent of its capital allocated to the car and battery maker.

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