This article is excerpted from Tom Yeung’s Profit & Protection newsletter dated Aug. 4, 2022. To make sure you don’t miss any of Tom’s picks, subscribe to his mailing list here.
Happy birthday, George Jetson!
Over the weekend, memes circulated that July 31 would have marked the birthday of The Jetson’s patriarch.
And Luke may well be right. Today’s eVTOL makers are advancing so quickly that levitating vehicles could one day be as ordinary as today’s smartphones. (I’m personally waiting on a robot housekeeper).
The same is beginning to happen with electric vehicles (EVs). Last week, Senate Majority Leader Chuck Schumer and Sen. Joe Manchin revealed their bill that would give a $7,500 tax credit to any American buying an EV. The deal would also remove the 200,000-vehicle phase-out that currently make General Motors (NYSE:GM) and Tesla (NASDAQ:TSLA) ineligible for the credit.
A 2023 Chevy Bolt could cost as little as $18,100 if the deal makes it through the Senate.
That would be game-changing for electric vehicle adoption. Only five other car models tracked by U.S. News and World Report have an MSRP under that figure. And that includes the Mitsubishi Mirage, a car so bad that Car and Driver gave it a 2.5/10 rating for its “sloth-like” acceleration and “rudimentary” interiors.
Meanwhile, a Jetson’s-like future beckons. General Motors’ Bolt already earns strong reviews for its “unexpectedly roomy interior” and “peppy response.” A price cut will make it one of the few new cars available for under $20,000.
Is the Inflation Reduction Act Bad News for TSLA Stock?
The Inflation Reduction Act tax credit, however, will make far less of a difference for TSLA stock and other high-end EV makers. The legislation phases out credits for sedans and wagons at $55,000 and SUVs at $80,000. None of Tesla’s current models would make the cut.
Moving down-market will also be a challenge. Toyota (NYSE:TM) and General Motors already produce around 10 million vehicles per year, giving them enormous scale in cheaper vehicles. A tangle of local and state laws in the U.S. also creates barriers for opening new dealerships; new entrants from India’s Tata Group to China’s homegrown SAIC brands have struggled to make inroads into the American market.
These are issues for Tesla’s long-term growth potential, as well as high-end competitors Lucid Motors (NASDAQ:LCID), Faraday Future (NASDAQ:FFIE) and Fisker (NYSE:FSR). Unlike the iPhone, where expensive models still cost less than the average performance laptop, high-end EVs are prohibitively expensive for all but the wealthiest of Americans. Monthly payments for new Model S cars run over $2,000 — a figure that needs between $250,000 to $350,000 annual incomes to comfortably afford, according to financial planning professionals. The tax credit will further widen this divide.
The bill won’t kill off TSLA stock. But it will certainly limit its growth potential by helping lower-priced competitors.
The Winners of the Schumer-Manchin Deal
So, who wins from the Senate’s $350 billion put towards greenifying the American economy?
In one sense, financially stable consumers stand to gain. The Schumer-Manchin deal not only provides a $7,500 tax credit to EV buyers. In its current form, the bill also extends tax credits on solar panels and creates a $4,000 one for used EVs. A deal on drug pricing could also cap Medicare payments to $2,000 out-of-pocket expenses.
But the effect for investors is more complex, especially for electric vehicle makers. (The bill’s critics will note it raises taxes on middle-income families and does little to cut inflation). The 10-year, $10 billion investment tax credit for clean-tech manufacturing facilities will get diluted among dozens of players; General Motors alone generated that figure in profits in 2021. And if every existing player receives a prorated amount from the fund, the tax benefits quickly become a zero-sum game.
It’s why “picks-and-shovels” plays have generally outperformed their vehicle-producing peers. Companies like battery research firm QuantumScape (NYSE:QS) saw their share price rise above $12 for the first time in two months on the announcement. And troubled solar firm Sunrun (NYSE:SUN) would see shares jump almost 40% on the news of the bill.
And that’s where an investment in Lithium Americas (NYSE:LAC) comes in.
The “Picks-and-Shovels” Play for the EV Industry
Lithium Americas is a winning combination of safety and growth for the Profit & Protection list. Unlike QuantumScape and other emerging-growth companies (i.e., zero-revenue firms), LAC will produce lithium — an ingredient that’s already used in current-day production. As mentioned in Friday’s newsletter, “Lithium Americas is a safer way to play the electric vehicle boom.”
That’s because, no matter which electric vehicle maker comes out ahead, each car will still need anywhere from 5-15kg of lithium metal to produce.
At the same time, LAC still has greater upside than rival Sociedad Quimica y Minera de Chile (NYSE:SQM) and other established lithium miners. LAC is still a startup with three projects in its pipeline and trades at a gaping “uncertainty discount” for that sin. Analysts at Morningstar peg LAC’s fair value at $65, a 160% upside even after factoring in startup risks.
That said, LAC does have some issues. Its Nevada mine at Thacker Pass has been dogged by lawsuits from activists, despite receiving approvals from both the Trump and Biden administrations. And it’s still unclear whether the firm’s Argentinian resources will qualify for the upcoming tax credits for clean-energy production.
Nevertheless, for those seeking startup-style returns, LAC provides far better downside protection thanks to its potentially low-cost production and the world’s insatiable demand for battery materials.
One More “Moonshot” Electric Vehicle Play
Luke Lango has also been taking a close look at the winners of the electric vehicle revolution. And a tiny company has caught his eye.
It’s not Lucid Motors…
Nor is it Tesla…
Instead, it’s an under-the-radar startup that’s potentially helping Apple create its next trillion-dollar blockbuster. And to see Luke’s presentation, click here.
The Inevitability of Combustion Engine Phaseouts
Even the Jetsons knew that fossil fuels would eventually disappear. Every oil field … every gas project … every fossil fuel reserve has a limited lifespan. Europe’s North Sea oil fields produce less than a third of what they once did in the late 1990s because the fields eventually run out. Even today’s advanced fracking technology will eventually drain America’s Permian basin.
In its place, vehicles will need a source of high-density energy.
Some believe hydrogen fuels are an answer. And the technology will have a place in transportation, especially where constant-use vehicles like forklifts and taxis have no time to recharge.
But for the remaining 90% of electric vehicles, lithium-ion technology reigns supreme. And investors who get in early on companies like Lithium Americas are the ones that stand to gain.
Tom Yeung is the editor of Profit & Protection, a free e-letter about investing to profit in good times and protecting gains during the bad. To join Profit & Protection — and claim a free copy of Tom’s latest report — go here to sign up for free!