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3 Surprising Ways You Can Play the Electric-Vehicle Revolution

By Lou Whiteman, Rich Smith, and John Rosevear - Sep 19, 2020 at 7:30AM

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Not sure who wins among electric-vehicle competitors? Consider instead investing in the companies that supply them.

Electric-vehicle stocks have taken investors on a wild ride in recent weeks, fueling a debate about whether the stocks are overvalued.

It's not an easy time to be an investor. On one hand, it appears we've hit a tipping point toward the inevitable electrification of the automotive industry. But the coming disruptions will create winners and losers, and with the disruptors trading at sky-high valuations, it is risky to just pile into the stocks. 

You could instead buy into some of the incumbent automakers that appear well positioned to compete in the new environment. Another option is to invest in companies that stand to do well no matter who the eventual winners are among automakers.

Here are three companies, Kensington Capital Acquisition (KCAC), Graf Industrial (GRAF), and Sociedad Quimica y Minera de Chile (SQM 5.78%), that we think should do well regardless of what brand of vehicle we are driving in the future.

Automobile engineers designing electric car platform.

Image source: Getty Images.

A powerhouse battery start-up

Lou Whiteman (Kensington Capital): Kensington Capital is a special-purpose acquisition company (SPAC), a shell company set up to bring a private company to public markets via a merger. Electric-truck maker Nikola (NASDAQ: NKLA) used a SPAC to go public earlier this year. In early September, solid-state car-battery maker QuantumScape announced plans to take a similar path to Wall Street by merging with Kensington.

QuantumScape is a Bill Gates-backed company developing the next generation of lithium batteries. It's solid-state, lithium-metal design in theory should be more stable, and therefore safer, than the lithium-ion batteries in use today. They also have greater energy density, which should translate into getting more miles out of a single charge and can also help to lower the overall weight of the car.

The company has a great pedigree. It was founded more than a decade ago based on research conducted at Stanford University, and in addition to Gates, counts Volkswagen (OTC: VWAGY) as an investor and customer. One-time Tesla (NASDAQ: TSLA) Chief Technology Officer J.B. Straubel is a member of QuantumScape's board.

The merger with Kensington will add even deeper ties to the automotive industry: The SPAC's CEO Justin Mirro spent more than two decades as an industry investment banker and at one time worked as an engineer at General Motors (NYSE: GM).

Post-merger, the combination will have about $1 billion in cash on hand to continue development and bring the product to market. There's always risk in investing in these development-stage companies, but the Kensington Capital/QuantumSpace combination has all the ingredients in place to be a success.

This EV-adjacent tech company is poised for big growth

John Rosevear (Graf Industrial): Graf Industrial is a SPAC that is expected to complete a merger with Velodyne Lidar by the end of September. The merged company will take the Velodyne name, and that's what I want to talk about here.

Velodyne isn't an electric-vehicle company per se. It's a leading maker of automotive-grade lidar sensors. Lidar is a technology that uses invisible laser beams to scan surroundings and form a detailed, precise 3-D image. While lidar sensors aren't necessary to electric vehicles, they are essential to just about every self-driving system currently under development, as well as some of the more advanced driver-assist technologies headed to market in the near future. 

With self-driving vehicles, the lidar-generated image of the car's surroundings can be compared with existing 3-D maps to double-check the car's precise location, dozens of times a second. Most developers see it as an essential safety component, even if the car is using another technology to do most of its navigation. 

A Ford Fusion with ArgoAI logos and self-driving sensor hardware.

Two of Velodyne's "puck" lidar sensors are visible at the top of the sensor stack on the roof of this ArgoAI self-driving test vehicle. Image source: Ford Motor Company.

What makes it relevant to us is that the development of automated driving is proceeding hand-in-hand with electric-vehicle development. Established automakers like General Motors and Ford, as well as new entrants like Local Motors, rely on Velodyne's sensors to help guide their driverless prototypes now and will likely be major Velodyne customers once those prototypes become production models.

Velodyne's sensors have many other applications, of course. Velodyne's current clients include start-ups working in construction, developing self-operating farming equipment, and even a company that uses robots to map complex crawl spaces inside hospitals. 

But as the auto industry transitions to electric vehicles, and as those vehicles become more and more sophisticated, Velodyne looks well placed to be a big winner. 

A surefire bet on a lithium future

Rich Smith (Sociedad Quimica y Minera): Electric cars require rechargeable batteries to hold their electricity. And rechargeable batteries require lithium for their construction -- quite a bit of lithium as it turns out. According to Tesla-watcher Electrek, just one single Tesla Model S battery contains "about 63 kg of lithium."  

As Tesla builds more of its Model Ses (and Model Xes, 3s, and Ys as well), and as major automakers including Ford, General Motors, and Volkswagen gear up to follow suit, demand for lithium is bound to rise. Recently, mining consulting firm Wood Mackenzie estimated that in order to meet demand for lithium to build all the batteries that will power all the electric cars flooding the roads over the next five years, producers must increase mining output by 800,000 tons of lithium carbonate equivalent annually.  

Who will produce all this extra lithium? Companies like Albemarle (NYSE: ALB), Livent (LTHM 14.21%), and Lithium Americas (LAC 4.11%) will certainly do their part. But if you ask me, the company best positioned to supply the rising demand for lithium -- and the best lithium stock to invest in -- is Sociedad Quimica y Minera de Chile.

Why? The answer is right there in the name: de Chile. Chile boasts the world's largest reserves of lithium metal -- some 8.6 million metric tons of the stuff, according to website Statista.com, or three times the reserves of runner-up Australia. And Sociedad Quimica y Minera -- SQM for short -- is based in Chile. It's in the right position for times like these when lithium is in such great demand.  

Mind you, at a valuation of 39.4 times trailing earnings, SQM stock is not cheap. But it is cheap-er than rival Livent. It carries a lighter debt load than rival Albemarle, and in contrast to Lithium Americas, which has yet to establish commercial scale production, SQM is doing $1.8 billion in annual sales -- profitably -- and generating positive free-cash flow to boot. In fact, it's been free-cash flow positive every year for the past decade.

As bets on the electric-vehicle revolution go, Sociedad Quimica y Minera is one of the surest I know.

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Stocks Mentioned

Sociedad Quimica y Minera de Chile S.A. Stock Quote
Sociedad Quimica y Minera de Chile S.A.
SQM
$113.33 (5.78%) $6.19
Graf Industrial Corp. Stock Quote
Graf Industrial Corp.
GRAF
Kensington Capital Acquisition Corp. Stock Quote
Kensington Capital Acquisition Corp.
KCAC
Lithium Americas Corp. Stock Quote
Lithium Americas Corp.
LAC
$28.14 (4.11%) $1.11
Livent Corporation Stock Quote
Livent Corporation
LTHM
$34.49 (14.21%) $4.29

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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