Best Lithium Battery Stock You’ve Never Heard Of: AONE, HEV, PPO, JCI

Hybrid and electric cars seem like they should be the investment opportunity of the decade, right? Last week, I was inspired to review the case for natural gas-driven trucks and cars after Steve Reitmeister’s visit to the White House where energy alternatives were discussed.

But, Administration energy official Heather Zichal didn’t talk about natural gas cars. That was just my preferred horse for the race. Zichal talked about the Obama plan to focus on “advanced batteries” for hybrid electric vehicles (HEVs). So today, I thought I would take a look at this area for possible plays. And I found an incredible performer for the past year or so that doesn’t seem ready to let up yet.

Polypore Clobbers A123

Remember that darling pure-play of lithium battery technology, A123 Systems (AONE)? Seems everyone thought you had to own it after its IPO in 2009. That IPO took a beating, though, going from $28 to $5 in the past eighteen months. Meanwhile, a little company with a specialty application for such batteries, and that goes by the ticker PPO, returned 500% to investors as the stock rose from around $12 to nearly $72 in that time.

Polypore, Inc. (PPO) makes highly specialized polymer-based membranes used in chemical and magnetic separation and filtration processes. With existing successful business lines in conventional automotive lead-acid batteries, the company’s patented “separation” technologies and membranes also serve electrical, industrial, and medical device products.

The microporous membranes Polypore produces are highly engineered polymeric structures that contain millions of pores per square inch, enabling the management of ions, gases and particles that range in size from the cellular to the nano or molecular level. The company’s energy storage division produces and markets membranes that provide the critical function of separating the cathode and anode in a variety of battery markets, including lithium.

For lithium batteries in particular, PPO markets a line of patented polypropylene and polyethylene monolayer and multilayer membrane separators that are used in numerous applications such as personal electronic devices, cordless power tools, and HEVs.

A Key Fundamental Indicator Made It Simple

How could you have found Polypore amidst the deluge of alternative energy companies since crude oil hit $147 per barrel in 2008? One key metric that always simplifies the earnings growth of companies down to an apples-to-apples comparison is the Zacks Rank.

Since January 2010, PPO was a either a Zacks #1 Rank (strong buy) or #2 Rank (buy) 19 times out of 21. The other two ratings were a Zacks #3 Rank (hold). The Zacks system of tracking analyst earnings estimates and revisions kept you in this stock from $12 to over $70, though it has since fallen back to $60.

Meanwhile, AONE for the same period was either a Zacks #3 Rank (hold) or #4 Rank (sell). Not once has the stock been anything above a #3 Rank. And with the consistent mediocre analyst estimates and revisions keeping the stock fluctuating between the two Zacks Ranks — about 16 times back and forth — investors have had good reason to stay cautious, or just stay away.

Monday’s upgrade of AONE by Morgan Stanely had the shares up over 15% at one point as the brokerage noted it expects the company to announce a major contract by January. If this move is followed by other analysts raising their earnings estimates, the stock may finally climb up from its #3 Rank and become a buy.

Until then, just wait for that day because you will still have plenty of time to get in the stock. Why is this true? Isn’t it better to be early? Not necessarily. Because the buying strength you want to see joining you should come from institutional investors. And they won’t move until the earnings picture is clear and rising. The Zacks Rank will tell you this and you will have many weeks to climb aboard before the big boys do.

Two More Lithium Names to Keep Charged

One more pure-play in this space to watch is Ener1, Inc. (HEV), an energy-related technology holding company which develops and markets lithium power technologies and products for stored energy and battery power, including secondary (rechargeable) cells, primary cells (non-rechargeable), battery packs, and electronics, through EnerDel, its majority-owned venture with Delphi Corp. The stock has suffered quite a bit since its frothier days, along with others in the industry, dropping from its 2008 highs above $9 to new all-time lows this year near $1.

The good news is that the stock has recently been the recipient of positive views from analysts. After spending a year with Zacks #4 and #5 Ranks for its abysmal earnings visibility, the name grabbed a #2 Rank (buy) on May 17. Trading for just over a dollar, it could be an aggressive small cap component to an investor’s alternative energy campaign.

On the other end of the spectrum, I suggest looking at a mature and diversified manufacturer like Johnson Controls (JCI). The automotive systems and electrical controls maker already had a strong business unit dedicated to conventional batteries, and with its very positive outlook on demand for light-weight, energy-dense lithium batteries, the company is forging ahead with R&D here. As a Zacks #3 Rank, this $24 billion dollar global automotive systems leader could be a more conservative vehicle for exposure to the future of alternative transport.

Catching Early Heat in New Industries

The bottom line with finding winners in the alternative energy wars is paying attention to earnings visibility. A lot of stocks catch early momentum if their “early mover” stories seem hot. But a lot of that heat may just be burning cash with no profits in sight for years.

The names that burn the hottest are the ones where several analysts start to picture a positive earnings outlook. And the Zacks Rank is always your first heads up because it is built primarily on the agreement and magnitude of upward (and downward) earnings estimate revisions.

By Kevin Cook

JOHNSON CONTROL (JCI): Free Stock Analysis Report

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