The world of energy storage and batteries is littered with disaster stories for investors. Charts that look like this two year depiction of Active Power Inc.’s price history are commonplace.
In fact, if you go even further back, it looks worse. In July of 2000, optimism was such that ACPW was trading above $350. Obviously, then, care has to be taken when recommending stocks in the area and even more care should be taken before acting on any such recommendation.
The temptation to do so can be strong. The case for investing in battery and storage companies is compelling and well publicized. The rapidly expanding global use of batteries in low and zero emissions vehicles, and the increasing need to store solar and wind generated power make it seem like an obvious play. The problem is that, like solar power itself, the battery and power storage industry has been a long time coming.
Many of the companies, including Active Power, have never been able to translate potential into profit. In this situation, however, given the obvious potential of the business, this record will not deter continued investment in the sector. That potential has been seen this week, as China BAK battery (CBAK) stock jumped 100% on Tuesday. This happened on news that South Korea’s LG Chem is planning to build an electric car battery factory in China. They will be building batteries for around 100,000 cars per year and CBAK, as a manufacturer of lithium battery cells, looks poised to benefit.
Long term CBAK could be a decent bet, even after that jump, as the Chinese government plans to supply 5 million electric vehicles (EVs) by 2020, making China the largest EV market in the world. The LG Chem announcement could well be the first of many, so further rises in CBAK should not be written off. In the short term, however, I would advise caution. Markets have a tendency to overreact to this kind of transformative news and a doubling in price in 24 hours looks a bit like an overreaction. If a correction of 20 or 30 percent comes over the next couple of weeks, though, it would set up a decent buying opportunity. If that doesn’t come then further rapid rises are unlikely, so there will be plenty of chances to buy in and caution will probably not be too costly.
There is a U.S. company that fits that profile as a supplier to the actual manufacturers and that also has the advantage of having passed through the profitability threshold a while ago. Polypore International (PPO) has made money every year since 2010 supplying the membranes that separate the components of lithium ion batteries. Positive cash flow is always a good thing and, given the prospects for EVs and hybrids, a forward P/E of around 23 doesn’t look excessive.
The stock jumped in May on news of an agreement to supply Panasonic, who in turn supply batteries for the Toyota Prius, and Ford’s Fusion and C-Max models. Recent research from Wedbush suggests that PPO may not replace Japanese company Ube’s joint venture with Maxell, who currently supply the seperators for those batteries immediately, but they will be the supplier on any new contracts Panasonic may win.
Again, while that news is completely priced in, it is the potential size of the overall market that makes PPO an attractive long term investment. Be warned, though, it is not something to buy and then ignore, nor is CBAK. As all of the above charts show, these stocks can be extremely volatile. If you do invest, then you should keep track of headlines regarding the companies and don’t hesitate to sell if there is bad news. You can always buy back later, but as you can see, the reaction to bad news can be steep and sustained.
I guess most industries with potential fulfill it someday. It would seem that after several false dawns the battery and storage business is about to do just that and CBAK and PPO look like the best ways to play it.