The next big thing… It’s the holy grail for investors. I mean how many investors wish they had bought Microsoft in 1986? Or Apple in the 1990s?
If you were prudent enough to take a chance on either of these companies, a relatively small investment a few years back would have made any investor fabulously wealthy today. And it’s that kind of wealth creation that drives investors to seek the next big thing.
After all, if it’s the next big thing, it shouldn’t be impossibly hard to identify early on, right?
So what if you were told that more than 500,000 cars, capable of driving themselves, are going to come off the assembly line in 2018?
Better yet, these cars will come off the assembly line at a cost of $35,000 — about the average price of a new car in America.
But that’s not even the remarkable part…
You see, experience tells me that self-driving technology will not just drive itself — it will also be electric.
Even The Wall Street Journal agrees, saying, “The electric powertrain, unlike that of the internal combustion engine, scales smoothly from tiny to huge, powering everything from 10-pound electric skateboards to 20-ton electric buses…”
And it’s this kind of talk that drove Tesla (Nasdaq: TSLA) to begin production at its huge facility outside of Sparks, Nevada, affectionately known as The Gigafactory. But they aren’t building cars at this massive facility. Instead, they’re building the most high-tech, lithium-ion batteries the world has ever seen.
But the batteries aren’t just for driverless vehicles. Tesla will eventually supply a record 80 megawatt-hours of energy storage to Southern California Edison, the largest electricity supplier to Southern California, in an effort to prevent blackouts and replace dependence on fossil-fuel electricity generation. This is in addition to the Powerwall 2 batteries the company already sells to homeowners for use in charging Tesla vehicles and providing electricity to homeowners.
Now, before you read any further, I’m not recommending Tesla stock. TSLA stock is overvalued based on every imaginable metric, making it suitable only for speculative purposes at this stage of the game.
Instead, the plan is to invest in the one company that will benefit most if Tesla comes anywhere near its production goals. But even if Tesla falls flat on its face, one company stands to benefit from the massive trend in electric vehicles which is estimated to hit the unbelievable level of $7 trillion by 2050.
This trend is so big that even Goldman-Sachs says the lithium-ion sector will grow by more than 33,000 times its current size by mid-century. This helps explain why Bloomberg forecasts that the world will require the equivalent of 35 Gigafactories to meet the power demands of electric vehicles.
So, what’s this company?
Albemarle Corporation (NYSE: ALB) is a large and profitable specialty chemical company, with a $14.5 billion market cap and a healthy 36.3% gross margin and a 21.5% operating margin for FY 2016. As you can see from the chart below, ALB has risen roughly 70% in the past 12 months.
Now, Albemarle isn’t as exciting as an electric car company, but in the world of investing, boring is oftentimes preferred over exciting, since exciting often comes with lots of volatility. Even so, a 70% return over the previous year is exciting no matter how you look at it.
Better yet, the company is proactive in the global trend toward driverless vehicles by focusing more on lithium and less on its smaller chemical markets niches. That will help the company accelerate the kinds of gains we’ve seen over the past couple of years.
Of course, the stock isn’t particularly cheap: it carries a forward P/E of more than 26. But with analysts’ expectations for greater than 15% annual growth for the better part of a decade, a high forward P/E ratio is justified — especially in light of increasing lithium demand and the soaring prices it will command in the decades to come.
Currently, lithium production is responsible for generating 33% of the company’s revenue and more than 50% of EBITDA and earnings. The challenge for Albemarle is growing their lithium production to meet future demand.
Thankfully, lithium isn’t all that hard to find, nor is it rare. Developing lithium mining projects just requires lots of cash and mining expertise. Both are in plentiful supply at Albemarle. For now, lithium isn’t traded on any major exchange, nor does it have futures contracts or swaps, but you can expect this to change eventually.
Albemarle depends on the overall electric vehicle market for its future growth prospects. From a risk management perspective, this makes Albemarle a relatively safe investment. The investment thesis undergirding this recommendation does not rely on the success of any specific automaker, but rather a massive long-term trend that can’t be stopped.
And at the end of the day, that’s the very definition of an investment holy grail.
Risks To Consider: There is no doubt that self-driving and electric vehicles are the wave of the future, but timing this trend is the biggest risk facing investors. While I believe the trend is already underway (although in its infancy), there are others who believe this trend will not materialize to any significant degree for another decade. If that is true, getting into the trend too early could subject investors to unnecessary volatility.
Action To Take: Buy ALB up to $140 per share by employing a dollar-cost averaging strategy over several months. Mitigate your risk by investing no more than 2% of your portfolio to ALB. Use a 25% trailing stop-loss to provide room for the stock to grow. The holding period for this stock is 10-plus years, so don’t expect to sell the position anytime soon.
— Richard Robinson
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Source: Street Authority