Lithium Penny Stocks to Watch
Is it time to forget the gold rush and instead go prospecting for lithium mines? A lot of analysts would like you to think so. After all, the industry as a whole is growing, demand is rising, and the applications of lithium are expanding. One of the best ways to take advantage of a growing industry is to get in on the ground floor with a penny stock, because of the possibilities for massive returns with a low barrier to entry.
But, when dealing with the lithium penny stocks to watch, it’s not as clear-cut as investors would like. First, let’s tackle the upside to lithium stocks and why many analysts are seeing gold when they look at lithium.
The World Is Going to Run on Lithium-Ion Batteries … Or So Elon Musk Hopes
Lithium-ion batteries have never been more in demand.
Both the increased presence of rechargeable batteries and the push to make cars more energy-efficient (more on this later) have boosted demand in the lithium market by 18% per year since 2010. (Source: “Lithium: Global Industry, Markets & Outlook,” Roskill Information Services, last accessed May 15, 2017.)
Chart courtesy of StockCharts.com
Lithium batteries now account for 37% of the total lithium consumption. Which is to say that energy is quickly becoming the main usage of lithium as a whole, while other uses—like construction and manufacturing—have declined, due to increased costs. Again, the rapid rise of batteries is one of the factors that has so many analysts intrigued.
Another benefit to lithium penny stocks is that governments across the world have been trying to put more stringent guidelines in place that would regulate emissions and fuel efficiency in car manufacturer fleets.
The U.S., naturally one of the biggest markets in the world for cars and new tech, has instituted a number of regulations that would dictate just how fuel-efficient vehicles have to be. The most recent regulations mandated that automakers field fleets with an average of 36 miles to the gallon. (Source: “Final Determination on the Appropriateness of the Model Year 2022-2025 Light-Duty Vehicle Greenhouse Gas Emissions Standards under the Midterm Evaluation,” United States Environmental Protection Agency, last accessed May 15, 2016.)
The operative word in that mandate being “average,” meaning that electric cars—by virtue of not consuming gasoline as fuel—can have a strong effect on the total fleet’s average.
Now, the rules don’t necessarily mandate that the company has to sell all those green cars that it produces, but that doesn’t exactly matter for lithium stocks, at least not at first. As companies are increasingly asked to build more fuel-efficient cars, obviously lithium is an integral part of that process and demand will go up.
The secondary effect is, however, that you can’t run on the government mandates forever. At some point, in order to continue to drive the demand of lithium, people will need to begin buying electric cars but, at least for now, the government mandate is a huge bonus to lithium stocks.
And the push isn’t just federal; California has instituted its own plan which does require that a certain amount of sales be of electric cars. The program, called Zero Emission Vehicle (ZEV), is notable, not only for the effects it has had on companies like Tesla Inc (NASDAQ:TSLA), but also that the most populous and richest U.S. state is now being given more incentive to purchase zero-emission cars. (Source: “What is ZEV?,” Union of Concerned Scientists, October 31, 2016.)
California is also a state known for its pioneering ways, and one that other states will be sure to emulate, should the program continue forward successfully.
All this, coupled with Tesla CEO, tech luminary, and part-time mad scientist Elon Musk pushing for lithium-ion batteries to be everywhere.
The company’s “Gigafactory,” a massive manufacturing plant in Nevada, is becoming operational, with the first parts of the plant opening up in order to produce lithium-ion batteries.
Consider this from the Tesla web site: “With a planned production rate of 500,000 cars per year in the latter half of this decade, Tesla alone will require today’s entire worldwide production of lithium ion batteries.” (Source: “Tesla Gigafactory,” Tesla Inc, last accessed May 15, 2017.)
That’s great news for lithium bugs. And having Elon Musk in your corner never hurts.
The Downside to Lithium Stocks
We’ve been through all the good parts about lithium stocks, but now let’s take a look at how average companies and lithium penny stocks are both specifically at risk.
First, let’s start with Elon Musk. While the man is undoubtedly one of the most well-known and popular businessmen of our time, that doesn’t mean his companies are problem-free.
Let’s get back to the Gigafactory. It is the beneficiary of massive subsidies from the State of Nevada. Tesla will receive $1.29 billion in tax incentives for building the Gigafactory. (Source: “Complete breakdown of the $4.9 billion in government support the LA Times claims Elon Musk’s companies are receiving,” Electrek, June 2, 2015.)
And those subsidies only grow in number when you expand to look at the entire Tesla company, as well as expand your view outside the state level.
The reason why that’s important, especially from a federal level, is that there’s a new sheriff in town. Or, rather, president.
Donald Trump has made no effort to mask, not only his doubt of global warming and the need to act to prevent it, but also his disdain of all things Barack Obama.
You see, those regulations I mentioned earlier were all done under Obama’s watch. Obama, of course, being far more amendable to the global warming cause and, therefore, more willing to pass legislation to try to reduce emissions.
Saying Trump is not on the same page would be an understatement. He has mentioned before that he may be willing to challenge the emissions program put in place by his predecessor. He also has the authority to challenge the ZEV program in California, if he chooses to do so.
All this puts the lithium market demand a little bit in jeopardy, as car manufacturers could be let off the hook by the current government, which would then result in lowered demand in lithium when projections were expecting growth, which would gut may lithium-ion battery stocks.
What You Need to Know About Lithium Penny Stocks to Invest In
The broad view of the industry as a whole shows both potential for increased growth as well as setbacks. It’s not necessarily one of the riskier markets, but there is a fair amount of speculation going on, which may scare off more nervous investors.
Adding lithium penny stocks to that problem only compounds the speculative nature of the industry.
Penny stocks are penny stocks for a reason. They don’t have a lot of things you would normally look for in a company you invest in, and therefore they take on a more risk/reward dynamic.
In the lithium field, especially, breaking in can be difficult for small-holder companies.
The top five lithium producers control two-thirds of refined output in terms of volume and over 80% when accounting for value.
That stranglehold on the market (at least for now) has made it difficult for smaller players to break in, although lithium penny stocks may be just small enough to squeak by.
My Final Word on Lithium Stocks to Watch
There is a lot to be excited about in the lithium market, and a lot to be wary of. With the power of politics potentially at play when it comes to the commodity, as well as the volatile nature of any mining business, you have some of the more potentially erratic stocks on the market.
But sometimes, the risk is worth the potential reward. Lithium penny stocks provide investors with a ground floor on what could be the most important mining yield this generation has ever seen.
Of course, it could also be stalled by anything from a new alternate technology being developed, to more efficient lithium batteries, to slow demand in the car market, etc.
But the point remains that lithium has the potential to be a truly game changing commodity in the near future.
Musk envisions a world where cars, houses, power plants—everything—is running on zero-emission power stored in lithium-ion batteries. Frankly, it’s not a far-fetched dream, but neither is it a guarantee.
When investing in lithium penny stocks, know the risks and take the same precautions that you take in all your other investments. Learn about the companies. Find out what their competitive advantages are. Check out their history and management, and as many details as you can find.
And know your game: do you want to hold this stock for years, or would you rather jump ship the second you’ve doubled your money?
There are a lot of questions that need answering before you dive in head-first. But I will say this: I, for one, believe in the green-tech revolution and believe that, at least for the near future, lithium will be playing a central role in that journey to emissions neutrality. Lithium penny stocks are a great way to get into the market, but it’s important to be aware of the risks.