How to Play the Inflation Bill

The Inflation Reduction Act is likely to pass … who are the losers? … a picks ‘n shovels EV winner … a green energy technology that will benefit

The Inflation Reduction Act is on track to become a reality.On Sunday, the $430 billion bill passed the Senate along party lines by a 51-50 vote, with Vice President Kamala Harris casting the tie-breaker.It’s now headed to the House of Representatives, where it will be voted on most likely this Friday. Given that Democrats control the House, the bill is expected to pass, with President Biden signing it into law shortly thereafter.So, how will this affect your portfolio?Well, we see some great opportunities here. But first, there are some losers too.

Losers of the Inflation Reduction Act

Off the top, any large corporations that have been able to use accounting to sidestep or reduce their tax load will get dinged. That’s because the bill imposes a 15% minimum tax on companies earning at least $1 billion a year.As a few examples, if you own Nike,, Archer Daniels Midland, or FedEx, this means your bottom-line earnings will be taking a hit.In 2021, a report by the Center for American Progress found that 19 companies in the Fortune 100 alone paid little or no tax.  If we narrow that to companies that paid 6% or less, we’d be looking at Amazon, Exxon Mobil, AT&T, Bank of America, and both Ford and General Motors.If the bill passes, all of them will be on the hook to pay more taxes…which translates to lower earnings…which translates to lower stock prices.Narrowing in on sector-losers, pharmaceuticals is at the top.That’s because one of the primary provisions of the bill allows the government to negotiate drug prices for Medicare recipients.For now, exactly which pharmaceutical companies and to what extent hasn’t been specified. On this note, here’s CNBC:

The impact on companies isn’t completely clear because it’s not known yet exactly which drugs will be the first subjected to price negotiations…In 2020, Medicare spent more than $1 billion on each of nearly 40 drugs. Bristol Myers Squibb’s blood-clotting treatment Eliquis ($9.9 billion), Bristol Myers Squibb’s cancer treatment Revlimid ($5.4 billion), and Johnson and Johnson’s blood-clotting drug Xarelto ($4.7 billion) top the list.

If your portfolio is heavy on pharmaceuticals, do some digging to find out which drugs are the biggest moneymakers for your companies. If those drugs relate to common health conditions of our elderly population, you’re likely to take a hit.

The biggest winners from the bill

It would appear that electric-vehicle companies would get a huge tailwind from the Inflation Reduction Act.That’s because the bill includes tax-credit incentives for electric-vehicle purchases – $4,000 for the purchase of a used EV, and $7,500 for a new one.But there’s some fine print to be aware of…The bill caps the price of eligible new cars at $55,000, which excludes Tesla’s most popular version of the Model 3 (plus all Model S and X vehicles). This also means that most or all of the EVs from Lucid and Rivian won’t qualify.In fact, if we look at the entire EV sector, many cars are priced out since the average electric-car cost in the U.S. hit $66,000 in June.EV manufacturers with average June 2022 transaction prices above $55K include BMW, Daimler, Rivian, Tesla, and Volkswagen. Ford is right at the cusp, with its average EV coming in at $54,602.The EV manufacturers more likely to benefit include: GM ($50,357), Honda ($37,699), Hyundai ($36,161), and Mazda ($29,953).For investment purposes, you could pick one of these less expensive EV manufacturers, but we think there’s a better way to play this.

The backdoor way to play EV credits in the Inflation Reduction Act

To set the stage, let’s return to CNBC for more about what’s in the bill:

More crucially, the bill includes requirements for domestic manufacturing of EVs and their battery components to qualify for the extended credit.As written, the law requires that 40% of battery components be sourced from factories in the U.S. or its free trade agreement partners; that batteries be U.S. made by 2029; and that Chinese components and minerals be phased out beginning in 2024.

This is setting the stage for a massive “picks ‘n shovels” investment play courtesy of something that is critical to EV batteries…Lithium.You can’t have an electric car without an electric battery. And our latest, cutting-edge batteries require lithium.Unfortunately, we’re facing a shortage of lithium today.Earlier this summer, The Wall Street Journal highlighted Rivian Automotive CEO RJ Scaringe’s warning that the shortage of battery supplies for EVs could be worse than the semiconductor shortage.From Scaringe:

Put very simply, all the world’s [battery] cell production combined represents well under 10% of what we will need in 10 years.

If this isn’t making bells go off in your head about a lithium investment, Elon Musk said during Tesla’s most recent conference call that demand for EVs will make the next half-decade a fantastic time to be an entrepreneur mining or refining EV-related lithium.From Musk:

It is basically like minting money right now. There’s, like, software margins in lithium processing right now.So, I would really like to encourage, once again, entrepreneurs to enter the lithium refining business. You can’t lose.

In past Digests when we’ve profiled the opportunity in lithium, we’ve highlighted three ways to play it: the Global X Lithium ETF (LIT), Albemarle Corp. (ALB), and Livent Corp. (LTHM).All three plays enjoyed solid gains yesterday, despite the S&P turning negative and ending the day down.LIT added 1.3%. Albemarle tacked on nearly 3%. And Livent was especially strong, climbing as high as 7.5% at one point in the session. It ended the day up nearly 5.5%.Better still, the gains are holding as I write on Tuesday even though the markets are selling off and the Nasdaq is down over 1%.Bottom-line, if you like EVs as an investment trend, then you should love lithium.

Other winners in the bill

Utility companies that use renewable energy are also likely to get a boost. That’s because nearly 1/3rd of the tax breaks in the bill go to tax credits for renewable-electricity plants.We can expand this bullishness to clean energy, solar, and renewable companies in general.A few potential stocks to consider…For an overall “green” utility company, check out NextEra (NEE). For hydroelectric power, there’s Brookfield Renewable Partners (BEP), and for solar, check out Enphase (ENPH), although Enphase appears pricy based on its recent runup in price.Our hypergrowth expert Luke Lango holds two green plays as “Top 10 Picks” in his Innovation Investor Portfolio. They’re up an eyewatering 87% and 65% over the last four weeks.Luke also has two sub-portfolios in Innovation Investor called “Green Tidal Wave” and “Electric Vehicles” that will benefit from this bill. For more specific investment ideas as one of Luke’s subscribers, click here.

Finally, for a longer-term play, check out hydrogen stocks

If made into law, the Inflation Reduction Act will create a new 10-year product tax credit for hydrogen production that will rise to as much as $3 per kilogram depending on carbon intensity.Yet again, this is an investment play that’s been on Luke’s radar.Here’s Luke from last week, before news of this bill even broke:

They say timing is everything. And right now, the timing is perfect to look for hydrogen stocks to buy.By “right now,” I quite literally mean right now.We said that 2022 would be the year hydrogen comes into its own as a viable clean energy technology. And that’s mostly due to the plunging cost of its production alongside the soaring costs of oil and natural gas. (It all comes down to economics).As a result, the $11 TRILLION Hydrogen Economy will start to emerge.

Luke points toward Plug Power (PLUG) as a way to play this, suggesting the party “is just getting started.”It’s important to understand that hydrogen as an investment has legs regardless of this legislation.To illustrate, Luke explains a recent deal between Walmart and Plug Power, in which Walmart agreed to buy 20 tons of green hydrogen a day from Plug.After detailing green hydrogen versus “gray” hydrogen (gray isn’t really a huge departure from fossil fuels), Luke writes:

Science seems to strongly back the claim that green hydrogen costs are at a tipping point.And it bolsters the belief over the next several years, improving economics will drive robust, widespread adoption of green hydrogen.In other words, Walmart may be the first in a series of mega-corporations that start buying green hydrogen for fuel…This the world’s largest retailer’s strategic deal to secure green hydrogen production before a “gold rush” occurs very soon.And this gold rush will send hydrogen stocks — and all alternative energy stocks — significantly higher.They say timing is everything. Well, today,  the timing couldn’t be more perfect for hydrogen stocks — or any alternative energy stocks, really.

The Inflation Reduction Act is just the icing on the cake.

We’ll let you know if something unexpected happens that details the legislation

But as of now, it looks like this bill will make it the distance. Given that, we know where a flood of dollars is headed.Get your portfolio ready.Have a good evening,

Jeff RemsburgEditor, InvestorPlace

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