Lately, I’ve spent quite a lot of time ruminating on this newsletter — how to make it better, more shareable, more engaging, less time-consuming to read while still informative, and so on. 

To check these boxes, changes must be made. 

While Due Diligence has stuck to a weekly cadence since 2021, I plan to unshackle myself from the creative chains of a scheduled release. Researching, writing, editing, and designing a newsletter every week is an ongoing, uphill climb, especially while balancing work. I feel like the quality of my writing suffers when I’m pressured to get something published in such a tight window, and that’s not something I want to burden you with. My goal is to provide valuable, insightful content — not be filler in your inbox.

Based on feedback, deeper dives into compelling companies (i.e., long-form stock reports) and Market Movers are the preferred formats. So, I plan to focus on these going forward. If that means 15–20 high-quality issues each year versus 52 mediocre ones, so be it. 

However, I have an idea brewing in the ole noggin — one that could check a lot of the boxes mentioned above. It’s still in the development phase, but I’ll share details soon. 

And in case you recently subscribed and this is your first issue of DD, I don’t want to give the impression that you signed up for nothing. You can peruse the archives for past reports, analyses, recommendations, etc.

With all that said, I hope you have a wonderful day and an even better weekend. 

Carter

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Without further ado…

Three Interesting Reads:

The Economy Is A Powder Keg, Boiling Over And Ready To Blow

By

“For 10 years, I’ve been ranting about how the stock market isn’t the economy, and laying out why one can move without affecting the other, but this odd relationship between equity markets and economic reality just seems like an insult to the natural laws of economics and free markets.”

Quoth the Raven (or QTR for short) is the pseudonymous author of Fringe Finance. In a recent piece, QTR outlined the market’s widening detachment from the economy, pointing out that, while equities might remain in their own blissfully ignorant universe, something has to give. Read on for additional color and QTR’s personal views on what areas will become “blowoff valves.”

Low stock market volatility masks ‘pain under the surface’

By Goldman Sachs

“A longer period of lower volatility usually comes with a perky economy. By contrast, Goldman Sachs Research expects U.S. GDP to expand 1.6% in 2023, which is below its historical trend, and growth is likely to slow from here. Credit tightening due to the U.S. banks stress is likely to weigh on growth for the rest of the year.”

Remember that detachment? Despite a slowing economy and banking turmoil, US stock market volatility is at a 20-month low due to strong economic data and cooling inflation. However, this calm might not last, as Goldman Sachs predicts slowing GDP growth and banking stress may increase volatility, with investors adopting a more defensive stance in their portfolios.

Interest Rate Risks are Collapsing Banks

By

“It’s not really the market that’s a problem, it’s the banks themselves and their customers waking up to the fact that many of them have either poor risk management, or no risk management at all.”

James Lavish, a 30-year Wall Street veteran, explores interest rate risk and its role in recent (and possibly future) bank failures. Read on to learn more about the nuances of interest rate risk and a possible massive flaw in the FDIC’s insurance fund. 

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Without further ado…

Are CLOs a Looming Problem?

Ah, controversy — where would the financial world be without it? Indeed, Collateralized Loan Obligations (CLOs) have stirred up their fair share of debates over the years, often playing the role of the misunderstood anti-hero in the financial narrative. 

Back up, what are CLOs?

A CLO is a financial instrument that bundles corporate loans into different risk levels called "tranches" (essentially, slices of the pie). The loans within a CLO are typically high-yield, high-risk loans (also known as "leveraged loans") made to businesses with less-than-stellar credit ratings. Since each tranche of the CLO has a different risk level, it also offers different interest rates for investors. The lower the risk, the lower the return; the higher the risk, the juicier the potential payoff. 

Here’s a good visual of a CLO’s structure from Oaktree Capital; notice that losses from any defaulted loans are absorbed from bottom (equity, the riskiest tranche) to top (AAA, the safest). 

The main reason CLOs are controversial lies in their close resemblance to the notorious Collateralized Debt Obligations (CDOs), those financial Frankensteins that were instrumental in the 2008 financial crisis. Because CLOs and CDOs are both structured products involving the pooling and tranching of various assets, some investors can't help but raise an eyebrow at the possibility of history repeating itself. That’s particularly true when recessionary fears disseminate throughout the masses, which was the case during 2020’s pandemic-induced bear market.  

What CLO critics and proponents have to say

Critics argue that CLOs can obscure the underlying loans, making it difficult for investors to assess the true level of risk. The concern is that this could result in a domino effect of defaults, reminiscent of the subprime mortgage crisis. Additionally, because CLOs often consist of high-risk, leveraged loans, they may contribute to excessive risk-taking and speculation in the financial markets. In plainer terms, greed has a history of blowing up in our faces. 

“The Looming Bank Collapse,” by Frank Partnoy, was published in The Atlantic in the summer of 2020. As you can probably guess, the catalyst of Partnoy’s “looming collapse” prediction was/is the CLO. 

“Despite their obvious resemblance to the villain of the last crash, CLOs have been praised by Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin for moving the risk of leveraged loans outside the banking system. Like former Fed Chair Alan Greenspan, who downplayed the risks posed by subprime mortgages, Powell and Mnuchin have downplayed any trouble CLOs could pose for banks, arguing that the risk is contained within the CLOs themselves.

These sanguine views are hard to square with reality. The Bank for International Settlements estimates that, across the globe, banks held at least $250 billion worth of CLOs at the end of 2018. Last July [2019], one month after Powell declared in a press conference that “the risk isn’t in the banks,” two economists from the Federal Reserve reported that U.S. depository institutions and their holding companies owned more than $110 billion worth of CLOs issued out of the Cayman Islands alone. A more complete picture is hard to come by, in part because banks have been inconsistent about reporting their CLO holdings. The Financial Stability Board, which monitors the global financial system, warned in December that 14 percent of CLOs—more than $100 billion worth—are unaccounted for.”

TLDR: Contrary to key government officials’ opinions (shoutout Jerome), CLOs still pose a significant threat to the financial system because banks are, in fact, invested in them.  

On the other hand, proponents of CLOs maintain that they are fundamentally different from the villainous CDOs. They argue that the loans in CLOs are diversified across industries and borrowers, reducing concentration and correlation risks. Furthermore, CLO managers actively manage the loan portfolios, unlike the static pool of assets in CDOs.

Around the same time as Partnoy’s article, Wharton finance professors Michael Roberts and Michael Schwert shared an opinion piece that took the opposite side of the argument. The UPenn tandem pointed to the performances of these two investment vehicles during the 2008 crisis as a prime example of their fundamental differences: 

“A study by Cordell, Feldberg, and Sass (2019) shows that AAA-rated tranches of CDOs issued before the 2008 crisis lost $325 billion during the following years. In contrast, Standard and Poor’s found that AAA-rated tranches of CLOs issued before the 2008 crisis lost nothing. This performance differential stems from differences in the assets that the two vehicles bought.

The CDOs that got into trouble during the financial crisis did not buy loans, they bought junior tranches of other CDOs (mortgage-backed securities) and credit default swaps (derivatives) referencing other CDOs. The process of repackaging CDO tranches into new CDOs significantly amplifies risk, which is why senior investors in those products lost so much money.

The typical CLO holds hundreds of loans diversified across dozens of industries. Exposure to any industry is contractually limited to 15% of the loan pool, while the maximum exposure to a single company is 2%. Thus, defaults must be pervasive across all sectors of the economy to materially affect the collateral pools of CLOs.”

TLDR: During the ‘08 financial crisis, the CDO market collapsed while CLOs were fine. This would suggest that CLOs are more structurally sound than CDOs, which, during the crisis, often magnified their risk by doubling down on other CDOs. 

How exposed are US banks to CLOs?

In the event of CLO chaos, the biggest concern would be the impact on banks, which represent the heart of the financial system. That wasn’t lost on the Wharton professors, who shared the CLO holdings of three major banks at the time:

“U.S. banks hold $104 billion of CLO investments, $83 billion of which sits on the balance sheets of three banks: JPMorgan Chase, Wells Fargo, and Citigroup. As a fraction of their assets, CLO investments are 1.1%, 1.3%, and 0.9%, respectively. As a fraction of Tier 1 capital, which regulators use to measure a bank’s ability to withstand losses, CLO investments are 17%, 17%, and 14%, respectively.”

In other words, CLOs represented a small percentage of their asset base. That was 2020 though, what about today? 

As of December, collectively, JPMorgan, Wells Fargo, and Citigroup have about the same amount invested in CLOs ($103.5 billion) as the US banks held at the time of Roberts’ and Schwert’s article ($104 billion). So, a net increase of roughly $20 billion, although JPM and WF are responsible for 98% of that total figure. Citigroup’s wasn’t as detailed in their public filings, but their total exposure to CLOs was much smaller at $2.6 billion.

So, JPM’s and WF’s shareholders' equity and retained earnings (i.e., tier 1 capital) are about four times the size of their CLO exposure. Less cushion than three years ago, but still an ample level of cushion.

What would it take for a doomsday scenario to occur?

To ask that another way, what would it take for CLOs to initiate the same level of widespread damage as CDOs did in 2008? According to Roberts and Schwert, unprecedented defaults, but we’d have bigger problems anyway. 

“If lenders were to recover $0.40 on the dollar for loans in default, then 60% of the loans in CLO portfolios would have to default before the AAA-rated tranches would even begin to lose money. To put that number in context, the cumulative default rate for risky debt during the worst three years of the Great Depression (1931-1933) was 31%.

If AAA-rated CLO investments default in large numbers, then the business sector will be facing its worst downturn in the history of our country. CLOs will be the least of our concerns.”

Are CLOs a problem right now?

Naturally, rising interest rates aren’t ideal for leveraged loans and, thus, CLOs. It’s common for businesses to roll existing loans into new ones as they mature (a process known as refinancing). Except when interest rates are high, there’s less appetite for risk from lenders, meaning access to capital recedes and many businesses can’t pay their debts. Surprise, surprise — expect leverage loan default rates to rise. 

Standard & Poor’s projects default rates to rise from 0.8% in January to anywhere between 1.25% and 4.5% by December, depending on whether you’re a glass-half-full or glass-half-empty kind of forecaster. 

In a broader context, here’s a historical charting of leveraged loan default rates (blue line) and Morningstar’s leveraged loan distress ratio (yellow line) — which is the ratio of leveraged businesses entering/in default relative to the total number of leveraged businesses. In other words, defaults likely rise by the end of 2023, but not to the levels of the dot-com bubble or financial crisis. 

Long story short, CLOs may not be our economy’s next undoing, but they’re certainly still something to keep an eye on. 

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Without further ado…

Avert Your Eyes: FRB Reports Q1 Results

Once upon a banking crisis, two large U.S. regional banks, Silicon Valley Bank and Signature Bank, took a nosedive in early March, sending ripples of panic throughout the global banking community. The government’s ensuing rescue may very well have buttressed the financial system from a meltdown reminiscent of ‘08 — but many banks aren’t out of the woods yet.

Caught in the turmoil was First Republic, the 14th-largest U.S. commercial bank. 

On Monday, FRB reported Q1 results, announcing a $100 billion drop in deposits (excluding $30 billion of rescue deposits from major banks) and a one-third reduction in net income. 

The bank's troubles began when two-thirds of its deposits were found to be uninsured, triggering scrutiny in the wake of Silicon Valley Bank's collapse. A rescue plan involving 11 big banks placing $30 billion in deposits at First Republic failed to alleviate concerns. Instead, the bank suspended dividends, its shares slumped further, and rumors swirled about its future as a stand-alone institution. 

Despite the setbacks, First Republic bravely claimed it would survive, but not without some belt-tightening — particularly "significant" executive pay reductions and a workforce cut of up to 25% by midyear. 

Investors, however, remain as jittery as a caffeinated squirrel, with First Republic's shares trading just above their all-time low. The restructure also casts a scorching light on $12 million of share sales by FRB executives ahead of the collapse and multi-million-dollar payments to the bank founder’s family. 

Three Insightful Reads

The Demise of Silicon Valley Bank —

The Invasion of Zombie Companies that Wasn’t — Goldman Sachs

A Share Bought is a Share Sold —

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Today’s community spotlight is .

Eagle Point Capital, the firm, is an RIA. Eagle Point Capital, the Substack, is a newsletter by the firm’s founders, and . When it comes to breaking down complex concepts and companies, Matt and Dan are superb. Moreover, the investment strategy that guides their portfolio is simple yet concrete and incredibly rational, which makes their bounty of insights easy to glean.

The duo shares a diverse range of content: reading roundups, excerpts from client letters, thought pieces, transcript notes, and, of course, stock analyses.

Here are a few of my favorites:

Eagle Point Capital

Reviewing the Fundamentals: The Three-Legged Stool of Stock Market Returns

A three legged stool cannot stand upright for more than an instant if it only has two legs. There are three legs to the stool that comprise a stock’s total return; growth, yield, and change in valuation. Unlike a piece of furniture, a stock can sustain above average returns with just one or two legs for a lengthy period of time. Eventually, though, inve…

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3 years ago · 23 likes · 3 comments · Dan Shuart

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Brookfield Corporation (Excerpt From Our Recent Letter)

The following is an excerpt from Eagle Point Capital’s Spring 2023 letter to clients. Every six months, EPC writes to clients to explain what they own and why they own it. The portfolio-specific portion of each letter is for clients and prospective clients only. To read EPC’s entire letter, including an update on each of our investments, please…

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Eagle Point Capital

Don't Just Do Something, Stand There! (An Excerpt From Our Latest Letter)

The following is an excerpt from Eagle Point Capital’s Spring 2023 letter to clients. Every six months, EPC writes to clients to explain what they own and why they own it. The portfolio-specific portion of each letter is for clients and prospective clients only. To read EPC’s entire letter, including an update on each of our investments, please…

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3 years ago · 3 likes · Dan Shuart and Matt Franz

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Recently, I asked you, my dearest readers, for your opinions on Due diligence. One addition that people wanted to see more of is Q&A and open discussion — so, today, we’re exploring the concept of price targets and forecasts, and I’d love to hear your thoughts. 

If you didn’t get a chance to fill out the DD survey, you can do so here (average time to complete is 4.2 minutes).

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Without further ado…

In early April, Morgan Stanley analyst Andrew Percoco lowered his price target for Plug Power from $35 to $15 — a 57% adjustment. The reasoning for Plug’s downgrade? If you read last week’s issue, it’s a familiar story: doubts that the hydrogen provider can achieve its rather bold sales and profit margin goals. 

Granted, Percoco’s 12-month forecast would still imply a 61% gain, roughly six times the market’s historical average return. But it begs the question…do price targets even matter?

In 2019, Barron’s explored this common Wall Street practice by comparing stock ratings to their consensus price targets. They dug up some pretty interesting insights. Of the 205 stocks within the S&P 500 that had “Buy” ratings, 28 actually had price targets below their share prices at the time. Moreover, there was a surprisingly high percentage of companies that did not have “Buy” ratings but still had at least 10% upside based on their price targets. 

Are Price Targets Meaningless?

What will shares of Apple be worth a year from today?

Beats me. 

Yet, that’s what Wall Street analysts are charged with calculating and sharing in their research reports.  

A price target is an estimate of a stock's future price, typically over a specific period (e.g., 12 months). Financial analysts set price targets based on their evaluation of a company's financials, business prospects, market conditions, and other relevant factors. 

But this reference point may lack utility for several reasons:

Inherent subjectivity: Price targets are influenced by each analyst’s approach to valuing a company — not to mention their individual perspectives, biases, and opinions. There are countless ways to determine a company’s intrinsic “worth.” Price-to-earnings ratios, sum-of-the-parts analysis, discounted cash flows, EBITDA multiples, M&A multiples — the list goes on. Analysts may arrive at varying price targets for the same stock due to differences in their assumptions, methodologies, or outlooks. 

Example: Tesla’s stock routinely receives wildly divergent price targets from different analysts. At the moment, they range from $85 to $320 per share, reflecting a high degree of subjectivity and differing opinions about the company's prospects.

Changing market conditions: Financial markets are dynamic and influenced by numerous factors, such as economic data, geopolitical events, and investor sentiment. Price targets are static (at least until they’re updated), so they may not account for these unpredictable factors, leading to discrepancies between projected and actual stock prices.

Example: The COVID-19 pandemic had a profound impact on global markets in 2020, causing several stocks to deviate significantly from their pre-pandemic price targets.

Overemphasis on short-term factors: Considering the time horizon (a year), analysts likely focus on short-term factors, such as quarterly earnings or near-term market trends, while overlooking a company's long-term prospects, competitive position, or the potential impact of industry disruptions.

Example: BlackBerry's stock received optimistic price targets during its peak in the late 2000s, but the emergence of smartphones like the iPhone drastically impacted BlackBerry's market position, causing its stock to fall short of analyst expectations.

To Forecast or Not to Forecast?

If you’re a long-time reader of DD, you know that I’ve included Wall Street’s price targets in past stock reports. Frankly, they’re semi-decent proxies for full-fledged models or intricate valuations — but they need to be taken with a grain of salt, especially by long-term investors.  

To give you an example, about a year ago, I shared my deep dive into MP Materials, one of my favorite stock reports to date. At the time, Wall Street was rather overeager, with a consensus price target of roughly $50 per share. I say “overeager” because MP was (and still is to an extent) in the initial phase of its rare-earth mining expansion. 

Comparatively, my valuation approach — which applied three relevant P/E ratios to run-rate EBITDA projections to determine a possible price range— pegged MP’s stock at around $35 to $38 per share for run-rate Stage I. 

MP is still progressing toward its projected volume outputs and beginning to execute Stage II plans, so $35 still feels like a good trading level. Right now, MP trades around $28 — well short of Wall Street’s average price target. 

What does that tell us? If anything, unanimously bullish outlooks and constant price hikes could signal a security is overvalued. 

In defense of Wall Street analysts, forecasts are rarely, if ever, spot on. There are just too many variables to account for. In that way, investing is as much an art as it is a science. 

But I’ve done enough talking — I want to hear your thoughts. 

Do you put any weight in price targets? Do you forecast share prices? If so, what’s your approach? 

Fire away in the comment section below. 

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Before we dive in, I want to extend a colossal thank you to everyone who participated in last week’s survey. If you didn’t get a chance to share your thoughts, you can do so here (average time to complete is 4.2 minutes).

The people get what the people want, and, based on initial feedback, the community overwhelmingly prefers Market Movers and Stock Reports. So, in an effort to appease everyone, I’ve combined portions of both content styles into one — the background, analysis, and outlook of long-form reports with the trend-spotting, topical nature of Market Movers.

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Without further ado…

Plug Power , a well-known name in the hydrogen space, could use a jolt. Shares closed at $9.67 on Wednesday, down 17.5% since last Friday, 22% YTD, and 69% from its 52-week high of $31.56.

Ultimately, a company’s share price is only as valuable as the investors that place value in it. What’s driving investors to lose confidence in PLUG?

Before we can address that, let’s quickly summarize Plug’s business.  

What Does Plug Power Do?

Plug Power is a leading provider of hydrogen fuel cell systems, focusing primarily on the material handling (e.g., forklifts) and electric vehicle markets. Their business strategy revolves around the development, manufacture, and deployment of hydrogen fuel cell systems as a clean and efficient alternative to traditional combustion engines and batteries. 

Here’s a four-point summary of their business strategy:

1. Expanding market presence in material handling: Plug Power has a strong presence in the material handling industry, with its GenDrive fuel cell systems powering forklifts and other warehouse equipment. Some of their major customers include Amazon, Walmart, and New Fortress Energy.

2. Diversifying into new markets: Plug Power aims to expand into new markets where hydrogen fuel cell technology can be a viable solution. For instance, they have ventured into the on-road electric vehicle market with their ProGen fuel cell engines, targeting delivery vans, buses, and trucks. Additionally, they have explored applications in stationary power, such as backup power systems for data centers and telecommunications.

3. Vertical integration and strategic partnerships: Plug Power seeks to vertically integrate its operations to control costs and improve efficiency. They have acquired several companies, like United Hydrogen and Giner ELX, to strengthen their hydrogen generation, liquefaction, and distribution capabilities. Additionally, they have formed strategic partnerships with companies like Renault, SK Group, and Airbus to expand their global reach and tap into new markets.

4. Investing in research and development: Considering hydrogen technology is still in its early stages, Plug Power continues to invest in R&D to enhance the performance and efficiency of its fuel cell systems, reduce costs, and develop new products for emerging applications.

How Does Plug Power Make Money?

Whenever I look into a company for the first time, I like to begin by figuring out how they make money. To me, it’s the easiest way to form an initial perspective and understanding of a business. In this case, Plug Power makes hydrogen fuel cell systems, which are used for things like forklifts, delivery vehicles, and stationary power generation. They provide these solutions to customers across a variety of industries, such as retail, manufacturing, and distribution centers.

In addition to selling fuel cell systems, Plug Power also generates revenue from associated services, such as maintenance and hydrogen supply for their fuel cell products. These services are often included in the initial sales contracts and contribute to the company's overall revenue stream. (But, as we’ll touch on shortly, these contracts aren’t exactly profitable.)

Perhaps more importantly, Plug Power has its eyes fixed on expanding its business by investing in green hydrogen production facilities and developing new products like electrolyzer platforms and on-road vehicles through partnerships and joint ventures. Essentially, the company wants to cover the entire hydrogen value chain, ranging from production, storage, and delivery to energy distribution — for instance, electrolyzers that create hydrogen, liquifiers to convert that hydrogen into liquid fuel, and tankers for storage. 

Why Is Plug Power Stock Going Down?

Skeptics can make a convincing case against Plug. 

• As it stands today, not all hydrogen is “green.” Quite the opposite. Most of the world’s hydrogen production (about 95%) still relies on natural gas and generates greenhouse gas emissions. Why? While more environmentally friendly, green hydrogen still isn’t as commercially viable.  

• Although Plug Power was an early player in the space, its first-mover advantage is questionable due to the competitive nature of the energy space and lack of a competitive moat. For example, a simple Google search yields a list of 19 other recognized electrolyzer manufacturers. 

• On the company’s Q4 earnings call, CEO Andy Marsh made an enthusiastic prediction: “I believe, the end of 2023, no one will question Plug's ability to scale the hydrogen economy.” But growth often comes at the cost of cash, and Plug bears point to its sizable cash burn as a point of operational weakness. For reference, Plug operations burned through $358 million in FY21 and $829 million in FY22 (130% change, the bad kind of growth).

• Along the same lines, execution has been a problem, with management tending to overpromise and underdeliver. For FY22, management initially projected revenue of $900–$925 million, before revising that guidance in October to “5% to 10% lower.” Then Plug fell quite short of the marked-down revision, with revenue of $701 million.

Plug Power's recent earnings call highlighted their less-than-ideal performance — they chalked it up to new product hiccups, hydrogen plant delays, and macroeconomic factors causing hydrogen costs to skyrocket. However, despite the multitude of bumps in the road, the company remained confident that their 2022 efforts will tell a different story (see Marsh’s quote above). 

Plug is currently targeting $1.4 billion of revenue with 10% gross margins. That would be a remarkable improvement, considering gross margins were awful in FY22 (-22%). The company’s fuel cells are the only materially profitable segment — everything else is sold at a loss.

What’s driving the company’s expected margin improvements? Plug’s shareholder letter highlighted the catalysts:

• Commissioning green hydrogen facilities, with internal cost of production one-third of third-party vendor costs

• Scaling mature and new fuel cell product platforms 

• Scaling world-class manufacturing to create substantial operating leverage 

• Continuing reliability enhancements across deployed material handling fleet, which is expected to benefit both service and PPA (power purchase agreements)

• Realizing Inflation Reduction Act (IRA) benefits, which are expected to positively affect margins across businesses.

Naturally, it remains to be seen whether Plug can accomplish these feats. On that note, the company has some rather optimistic targets for the rest of the decade:

Plug Power Outlook

We’ve spoken at length about the government-backed clean energy push. It’d be naive of us to ignore such a robust, secular tailwind. Tax incentives and private investments will provide a much-needed boost and help bridge the gap to cost efficiency. With that in mind, Plug Power's outlook is generally positive, from a 30,000-foot, long-term perspective. The company has a strong foothold in the material handling market and is actively expanding its operations to become an end-to-end hydrogen solution. 

However, there are plenty of challenges to consider. The hydrogen fuel cell industry's growth is contingent on advancements in technology, infrastructure, and policy support. Plug Power will need to continue investing in R&D and forging strategic partnerships to address these challenges and maintain a competitive edge. At the same time, being prudent stewards of capital and optimizing margins will be critical to not only the company’s positioning but also survival. Something it hasn’t proven capable of quite yet.

PLUG is not a value stock — it’s a speculative bet on both hydrogen’s place in the clean energy economy as well as Plug’s role in that ecosystem. Frankly, management’s margin forecasts for the next several years seem way too aggressive, so don’t be shocked to see margins struggle to reach lofty expectations. 

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So, in place of my typical analysis, may I humbly request that you take five-ish minutes to answer a few questions? I would be eternally grateful and, with enough responses, I should be able to fine-tune Due Diligence by tailoring it to your preferences. 

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THANK YOU.

The investment world is expansive. For the active investor and aspirational learner, it can stoke curiosities in perpetuity, which makes writing about it a challenge. There are countless lenses to view it through — I started with comprehensive yet relatively succinct reports on individual companies; I migrated to shorter analyses of market movers; I took a detour with meme stocks; and, more recently, I adopted a thematic approach, spotlighting companies and industries that are well-positioned to benefit from the flow of capital.

I say this to express my respect for and appreciation of another investing newsletter in the Substack community, one that’s explored various perspectives of the investing world: Investment Talk.

Conor, the man behind the discussion, creates and curates a range of articles about the stock market, the companies within it, plus a wide variety of musings.

Market Talk, the newsletter’s staple segment, shares five must-read pieces of content every other Sunday, ranging from light reads like Peter Thiel’s “Competition Is for Losers” to dense AF reads like “The Psychology of Human Misjudgment” by Charlie Munger. Here’s a recent example:

Investment Talk

Competition is for Losers, Tsundoku, Munger's Speech & Losing Your Fastball

Hey, you are reading Investment Talk. If you’d like to join the 19,700 other readers learning about life, the stock market, and the companies within it, subscribe below. You can check out my other articles and follow me on Twitter too. If you enjoy today’s article, then feel free to share it, it helps a lot. Now let’s begin…

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3 years ago · 21 likes · 12 comments · Conor Mac

Conor also hosts interviews and dives into individual companies. But what sets Investment Talk apart, in my opinion, is that it isn’t just an investment newsletter, it’s an open commentary on life with investment themes woven in. It’s easy to lose oneself in the abyss of markets. Conor reminds us to take a step back every once in a while. I challenge you to read the following piece, “The Bit In The Middle,” without entering an elevated stage of consciousness and self-reflection.

Investment Talk

The Bit In The Middle

Hey, you are reading Investment Talk. If you’d like to join the 19,300 other readers learning about the stock market, the companies within them, and life, subscribe below. You can check out my other articles and follow me on Twitter too. If you enjoy today’s article, then feel free to share it, it helps a lot. Now let’s begin…

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3 years ago · 43 likes · 9 comments · Conor Mac

Thanks for reading. Don’t forget to hit the heart button if you enjoyed today’s report.

If you haven’t subscribed already, you can do so here.

If this is your first time with us, don’t forget to subscribe here. If you enjoy today’s issue, please hit the heart button at the end of the report.

Free stock research

Without further ado…

These days, hydrogen isn’t just an element, it’s a globally recognized buzzword that’s treated like a golden ticket to future prosperity. 

Perhaps that’s true. 

The hydrogen value chain is just that — valuable. While there’s plenty of money to be made across the entire sequence, upstream is the place to be. McKinsey estimates $45–$55 billion of EBIT in 2030 for upstream players, versus “only” $11–$14 billion of EBIT for midstream and downstream players. 

And no one’s buying more golden tickets than Air Products, a major player in the upstream market for hydrogen production whose principal business is selling gasses and chemicals for industrial uses. Although the company is based in the small town of Allentown, PA, Air Products is anything but small — and it has invested heavily in numerous hydrogen projects. 

Since 2017, the company’s capital expenditures have increased nearly five-fold from $1 billion to $4.7 billion last year.   

According to the company’s shareholder letter, Air Products plans to commit more than $15 billion to blue and green hydrogen mega projects by 2027, establishing itself firmly at the forefront of the hydrogen economy.  

Let’s glance at a few of the company’s biggest projects. 

Saudi Arabia: $5 Billion Production Facility in NEOM

Saudi Arabia is known for its oil prowess, second on the oil production podium with an 11% world share (below the United States). However, it’s a little too reliant on the world’s largest fossil fuel; it accounted for 77% of the country’s exports in 2021. The Saudi government recognizes that hydrogen is the future, which is why it plays a prominent role in its Vision 2030 initiative. 

The Kingdom is revamping its economic infrastructure, building full-fledged “smart” cities — two of which are Neom and Jazan. (Perhaps you’ve heard of THE LINE, which will reside in the former.) Air Products has a hand in green energy projects in both cities. Here’s a summary from the 2020 press release:

Air Products, in conjunction with ACWA Power and NEOM, announced the signing of an agreement for a $5 billion world-scale green hydrogen-based ammonia production facility powered by renewable energy. The project, which will be equally owned by the three partners, will be sited in NEOM, a new model for sustainable living located in the north west corner of the Kingdom of Saudi Arabia, and will produce green ammonia for export to global markets.

Saudi Arabia: $12 Billion ASU/Gasification/Power Joint Venture at Jazan

Speaking of oil, Air Products secured a contract with Saudi Aramco, the world’s largest company, back in 2015. Under the agreement, the JV was “to build, own and operate the world’s largest industrial gas complex to supply 75,000 metric tons per day (20,000 oxygen and 55,000 nitrogen) to Saudi Aramco’s refinery and Integrated Gasification Combined Cycle being built in Jazan, Saudi Arabia.” 

The JV recently completed a $12 billion acquisition of assets, so now it will own and operate the facility under a 25-year fixed-fee contract, supplying Aramco with clean energy. 

USA: $4 Billion Mega-Scale Green Hydrogen Production Facility in Texas

Naturally, Saudi Arabia isn’t the only country making moves in the hydrogen economy. There are plenty of projects on our home turf — such as the largest green hydrogen facility in the US. 

According to the press release: 

The facility, which is targeted to begin commercial operations in 2027, will serve growing demand for zero-carbon intensity fuels for the mobility market as well as other industrial markets. It will yield a totally clean source of energy on a massive scale, and, if all the green hydrogen were used in the heavy-duty truck market, it would eliminate more than 1.6 million metric tons of carbon dioxide (CO2) emissions annually when compared to diesel use in heavy-duty trucks. Over the project lifetime, it is expected to avoid more than 50 million metric tons of CO2, the equivalent of avoiding emissions from nearly five billion gallons of diesel fuel.  

We’ll keep an eye on Air Products and their investments going forward, a summary of which is outlined below:

Three Eye-Opening Tweets

And finally, we close with three eye-opening tweets. 

SI in November 2022: Great. SI in January 2023: Terrible.

Speaking of failures…

The old guard remains resilient (hopefully)

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The hydrogen economy is still in its infancy. There’s a big need for infrastructure, which should benefit from public policy by way of tax credits and grants. But even then, sometimes companies need to explore unconventional approaches to jumpstart growth.

Such as partnering with a competitor. 

Keep Your Friends Close and Your Enemies Closer

In December, Nikola and Power Plug — two hydrogen-focused competitors — announced a surprising partnership for the betterment of the industry. 

Nikola makes heavy-duty, commercial trucks that run on batteries and fuel cells (known as BEVs and FCEVs, respectively). But the company has plans to build hydrogen production facilities and fuel stations under the brand HYLA. Meanwhile, Plug develops hydrogen fuel cell systems for a range of vehicles and equipment, but the company has started producing hydrogen-powered heavy vehicles under its joint venture with Renault, Hyvia. So, there’s some overlap.

As far as the agreement goes, here’s a summary: 

• Plug will buy up to 75 Nikola Tre FCEVs over the next three years; the Tre FCEV is expected to begin production in the second half of 2023. For reference, Nikola sold 131 Tre BEVs in 2022, so it’s a noteworthy deal for Nikola. 

• Nikola will buy a Plug hydrogen liquefaction system for its in-development Arizona hydrogen hub, as well as 100–125 tons per day of green hydrogen. 

It’s a step in the right direction for building the hydrogen economy, but it remains a tall, expensive task — and both companies have their work cut out for them, particularly Nikola. 

Will they even be around to see the benefits of this agreement?

How Is Nikola Doing Financially? Spoiler: Not So Great

As an automaker, Nikola’s most prominent KPI is ***drum roll*** truck sales. Nikola initially planned to deliver 300–500 trucks to dealers in 2022; they fell very short, delivering 131. Misses happen, but the reasoning behind the miss is a bigger concern. 

Nikola faces a sort of chicken-and-egg dilemma. Trucks need built-out networks of charging/fueling infrastructure. However, that infrastructure needs a large enough fleet of trucks coming in and out to operate profitably — and opening stations is a lengthy, red-tape-riddled process that requires significant capital.

Scaling to fleet-level infrastructure is a daunting challenge alone, current macroeconomic conditions aren’t making it any easier. On the company’s Q3 earnings call, management admitted that Nikola’s customers are reluctant to invest in charging infrastructure amid broader headwinds, which they reaffirmed on their recent Q4 call. 

In light of these headwinds, the Nikola management team has opted to produce fewer Tre BEVs than it initially planned for in 2023 because, at the company’s current scale, the cost to produce a single truck dwarfs its average selling price. So, the more trucks Nikola sells, the greater its gross losses. To give you an idea, Nikola generated $6.6 million of revenue in Q4 from truck and charging product sales; the associated bill of materials alone — which doesn’t account for fixed costs like labor and overhead — was $8.6 million. 

Here’s management guidance for 2023:

We plan to produce 250 to 350 Tre BEVs, and 175 to 225 Tre fuel cell electric vehicles [in 2023] and deliver 250 to 350 Tre BEVs and, beginning in late Q3, 125 to 150 Tre fuel cell electric vehicles.

Our revenue guidance is 140 million to 200 million. We anticipate gross margins for the full year 2023 will be -75% to 95%. 

That’s far beneath the company’s production capabilities at its Coolidge plant, which will have a nameplate annual capacity of 20,000 units once Phase II of its expansion is complete (est. Q2 of 2023). 

Operating performance will only look worse in the meantime, while the company integrates its recent acquisition of Romeo Power into its financials. Eventually, Nikola hopes to achieve significant cost savings by transitioning battery modules and pack production from Romeo to its Coolidge truck production facility. 

We have already realized $31,000 in material savings per truck post-close, as the temporary pack price increase associated with delivery incentives before the Romeo transaction close no longer is in effect. We expect to achieve an additional $41,000 [per truck] in material savings by switching the battery pack enclosure and junction boxes manufacturing process from machined billet to casting. Additionally, by transitioning battery modules and pack production to Coolidge and implementing battery line automation, we expect to reduce labor and overhead costs by roughly $33,000 per vehicle. We believe bringing battery module and pack manufacturing in-house provides us with long-term strategic value.

As of right now, Nikola estimates that gross profitability is right around the corner.

Our current plan is to achieve a positive gross profit margin in 2024 and break-even to positive EBITDA in 2025. We believe our outlook is achievable if our business develops as planned, our business milestones are achieved, and we will continue to have access to necessary capital. We are laser-focused on executing our glide path to profitability.

Using 2022 as a benchmark, that’ll be quite the achievement.

In short, Nikola is far away from achieving cost efficiencies, let alone operating at a profit. Considering Nikola’s operations burned through $576.7 million in 2022, Nikola’s future rests in the hands of the capital markets. 

Three Eye-Opening Tweets

And finally, we close with three eye-opening tweets. 

Oh, the irony. 

Not looking good for SIVB.

The realest real estate advice of the year. 

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It’s well-documented that lithium demand is expected to outpace supply in the coming years, so owning and operating lithium mines could be a very lucrative venture — high lithium prices translate to high revenue. 

But prices have slipped a bit in recent months. 

And they could slip even more. 

On Friday, February 17, lithium stock prices suddenly tumbled down the mineshaft, as the likes of Albemarle (ALB), Livent (LTHM), SQM (SQM), Piedmont Lithium (PLL), and Lithium Americas (LAC) lost about $6.6 billion in market value, collectively.  

But why?

CATL Adjusts Its Pricing Strategy 

If you’re familiar with the EV industry, you should know the name Contemporary Amperex Technology — or CATL. The Chinese battery maker accounted for almost 40% of global EV battery sales in 2022, making CATL the world’s top producer. 

In 2022, CATL tethered its battery prices to lithium, which means the spike in lithium prices was passed onto the battery maker’s customers. Suffice to say, as the world’s biggest producer, CATL has some pricing power when it comes to lithium-ion batteries. 

So, it’s no wonder that lithium stock prices dropped when CATL announced a major adjustment to its pricing strategy for strategic partners, such as NIO, Li Auto, Huawei, and Zeekr. In exchange for buying 80% of their EV batteries from CATL, these Chinese automakers could buy batteries at a bit under $30,000 per ton of lithium carbonate. (Current prices are about $55,000.)

Why cut prices?

If you’re an automaker that’s investing heavily in EV rollouts, five-figure price tags are scary — they eat into margins. In turn, more and more automakers are following in Tesla’s footsteps and becoming battery makers too, such as Ford, GM, Toyota, and Honda. 

Nio is a recent addition to this list — the Chinese automaker plans to open a battery plant that’s expected to power about 400,000 EVs per year.

By giving some of its biggest customers the option to secure cheaper batteries, CATL can continue to scale its battery operations. 

Why cut prices so drastically? 

It can afford to. CATL mines some of its own lithium, so it’s willing to sacrifice mining profits to sell more batteries and remain in the pole position.

What does this mean for lithium miners? 

That remains to be seen. On one hand, falling lithium prices should hurt mining margins. On the other hand, demand should continue working in favor of lithium prices and sales. At least one major lithium player expects China to remain in growth mode; here’s Kent Master, President, Chairman, and Chief Executive Officer of Albemarle. 

We continue to expect EV sales in China to grow 40% year over year, an increase of nearly 3 million vehicles.

Our contract customers are not slowing down their ordering patterns, and early indications are both that cathode inventory and battery inventory in China are decreasing, which is a good sign for lithium sales.

Three Eye-Opening Tweets

And finally, we close with three eye-opening tweets. 

The new Mexico is…New Mexico (in terms of oil production).

Was this real…?

A thread on Buffet and BRK.A’s performance over the years :

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What’s that saying? 

Shoot for the moon. Even if you miss, you'll land among the stars.

Well, aside from the fact that the closest star is trillions of miles away, making this an egregiously inaccurate cliche, you could say the government is shooting for the moon with respect to its climate goals and hoping for the best. 

In April 2021, the Biden administration set its sights on cutting net greenhouse gas pollution in half (relative to 2005 levels) by 2030 and achieving net-zero emissions by 2050. 

Ultimately, the goal is to improve our collective sustainability. 

Based on this rather well-articulated definition, sustainability is a universally applicable pursuit. And it shows — just google “sustainable” followed by any industry or sub-industry.

Sustainable mining.

Sustainable energy.

Sustainable farming.

Sustainable finance. 

But it’s easy to get lost in the weeds and tangled in buzzwords. That’s where hard data can be useful. 

Hannah Ritchie is not only the Head of Research at Our World in Data and a Senior Researcher at the University of Oxford but also the author behind Sustainability by numbers, a newsletter dedicated to answering the most pressing sustainability questions by using hard data. 

What kind of questions? 

Here are just a few she’s explored that happen to relate to some of the themes we’ve discussed here:

Does the world have enough lithium to move to electric vehicles?

Sustainability by numbers

Does the world have enough lithium to move to electric vehicles?

People have often worried that the world would run out of fossil fuels [see Hubbert’s curve on ‘peak oil’]. This concern is shifting to the minerals we need to build low-carbon technologies. “The world doesn’t have enough lithium” is a common pushback against a move to electric vehicles…

Read more

3 years ago · 68 likes · 37 comments · Hannah Ritchie

The mineral monopoly: will low-carbon technology be controlled by a few countries?

Sustainability by numbers

The mineral monopoly: will low-carbon technology be controlled by a few countries?

Many countries tried to boycott Russian goods when it invaded Ukraine last year. But this hasn’t been easy. Russia was the world’s largest fossil fuel exporter in 2021, and many countries – especially in Europe – have struggled to find alternatives. The war put our fossil fuel dependency in the spotlight…

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3 years ago · 55 likes · 9 comments · Hannah Ritchie

Are electric cars better for the climate than petrol or diesel?

Sustainability by numbers

Electric cars are better for the climate than petrol or diesel

For a more in-depth analysis of the climate impact of electric cars, I recommend Zeke Hausfather’s analysis on Carbon Brief. Electric vehicles are marketed as an important technology to reduce CO₂ emissions. But, electric vehicles (EVs) still need electricity to run, and manufacturing batteries can be energy-intensive…

Read more

3 years ago · 58 likes · 63 comments · Hannah Ritchie

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Climate change is bad.

I’d like to think we’re all onboard with that, but let’s refresh our understanding of the environmental sciences and look at why it’s bad:

Climate change encompasses not only the rising average temperatures we refer to as global warming but also extreme weather events, shifting wildlife populations and habitats, rising seas, and a range of other impacts. [National Geographic]

The root cause of climate change is the burning of fossil fuels (natural gas, oil, and coal) and the subsequent excessive creation of greenhouse gasses, most notably carbon dioxide. The world needs energy to sustain itself, hence the burning of fossil fuels, but the operative word before was “excessive” because our energy needs are perpetually growing, so we’re pumping alarming levels of carbon dioxide into the atmosphere. 

Greenhouse gases occur naturally and are part of our atmosphere's makeup. For that reason, Earth is sometimes called the “Goldilocks” planet — its conditions are not too hot and not too cold, but just right to allow life (including us) to flourish. Part of what makes Earth so amenable is its natural greenhouse effect, which keeps the planet at a friendly 15 °C (59 °F) on average. But in the last century or so, humans have been interfering with the planet's energy balance, mainly through the burning of fossil fuels that add carbon dioxide to the air. [NASA]

The oversimplified solution is to make a broad energy switch from fossil fuels to renewable ones, such as hydrogen. Unlike natural gas, oil, and coal, pure hydrogen doesn’t emit greenhouse gasses when burned — only harmless water vapors. 

However…

1. Pure hydrogen is not only extremely reactive and flammable but also rare (at least on earth), which means we have to rely on chemical processes to create it.   

2. Not all hydrogen is created equally; certain processing methods can still produce carbon dioxide, partially offsetting the environmental benefits.

Enter green hydrogen, the only true “clean” hydrogen that can be produced in a climate-neutral fashion. Electrolysis is a process in which an electrical current passes through water and separates hydrogen from oxygen. Coupled with a renewable energy source like wind or solar, you produce a truly carbon-neutral fuel.  

While green hydrogen is clearly the ideal option of the hydrogen rainbow, over 95% of current hydrogen production uses fossil fuels. Part of the problem is cost — it has to be economically viable to commercialize green hydrogen. 

In 2021, green hydrogen cost around $5 per kilogram in the US; by comparison, gray hydrogen was $1.50/kg. Prices are expected to fall though thanks to macroeconomic forces and sizable incentives from public policy. 

In June 2021, the Department of Energy launched the “Hydrogen Shot” initiative, aimed at accelerating hydrogen technology advancement in order to cut the costs of clean hydrogen by 80% to $1/kg by 2030. 

If the Hydrogen Shot goals are achieved, scenarios show the opportunity for at least a 5-fold increase in clean hydrogen use. A U.S. industry estimate shows the potential for 16% carbon dioxide emission reduction by 2050 as well as $140 billion in revenues and 700,000 jobs by 2030. [DOE]

Then, in June 2022, the Bipartisan Infrastructure Law added $9.5 billion of funding for clean hydrogen.

More recently, the Inflation Reduction Act created a tax credit for the domestic production of clean hydrogen — up to $3/kg for qualifying companies. That could pave the way for green hydrogen to rival its fossil fuel counterparts. 

6 green hydrogen companies that benefit from the Inflation Reduction Act

So, who’s positioned to benefit the most from the government’s hydrogen subsidies?

Let’s highlight the six of the most prominent hydrogen players:

• Air Products & Chemicals, Inc.

• Plug Power Inc

• Bloom Energy Corp

• Ballard Power Systems Inc

• FuelCell Energy Inc

• Nikola Corp

There are also bigger companies that aren’t pure plays in the hydrogen space but have related projects in the works, including (but certainly not limited to) Cummins Inc. , Shell , and Linde .

We’ll keep an eye on these stocks and dig into recent developments over the coming weeks.

Three Eye-Opening Tweets

And finally, we close with three eye-opening tweets. 

Plastic is back. 

Speaking of credit cards, what’s going on at AMEX? (See thread)

Bounce back or false hope?

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Let’s start the day with another pop quiz. (No science questions this time.)

Pop quiz: What percentage of vehicle sales belonged to EVs in 2021? *Bonus points if you can guess 2022’s early estimates*

About a year and a half ago, the Biden administration set a bold target for electric vehicles: a 50% share of total car sales by 2030. At first glance, that feels pretty ambitious, considering EVs represented only 5% of vehicle sales in 2021 and early estimates peg 2022’s figure at 5.8%, according to Cox Automotive (EV data; total data). 

But a basic eye test would tell us that a tenfold increase isn’t impossible. As we mentioned in a prior issue of DD, the 5% milestone is a big one. If the US demand curve follows in the footsteps of other countries that have surpassed this threshold, EVs would be on pace to hit 25% of new car sales by 2025. (Although a recession would certainly disrupt that timeline.)

More importantly, the US government has committed to reducing reliance on China by encouraging the development of domestic supply chains via multi-billion-dollar infrastructure investments and incentives, which includes the auto industry. 

And the private sector has followed suit. Per a recent Reuter’s study: 

The world's top automakers are planning to spend nearly $1.2 trillion through 2030 to develop and produce millions of electric vehicles, along with the batteries and raw materials to support that production.

Tesla, today’s EV market share leader, wants to ensure it holds onto this title, gunning for a staggering 20 million EV sales in 2030. For comparison, Tesla delivered 1.31 million vehicles in 2022.

While Tesla hasn’t outlined spending plans, Reuters estimates this level of production would cost $600 billion to achieve, as the automaker would need several more assembly plants and battery factories.

But Tesla isn’t the only automaker pouring capital into EV expansion. Let’s look at the rest of the field’s impending spending sprees as well as who they’re partnering with for solid-state batteries. (If you missed last week’s issue on solid-state batteries, you can check it out here.)

• Volkswagen: $100 billion (solid-state battery investment: QuantumScape)

• Toyota: $70 billion (Prime Planet Energy & Solutions)

• Ford: $50 billion (Solid Power)

• Mercedes: $47 billion (Factorial Energy)

• Honda: $40 billion (Solid Energy Systems)

• BMW: $35 billion (Solid Power)

• Stellantis: $35 billion (Factorial Energy)

• GM: $35 billion (Solid Energy Systems)

Hyundai: $16 billion (Solid Energy Systems and Factorial Energy)

It’s difficult to predict the outcome of a multi-year race, but our guiding principle may hold true in determining the winner: follow the money.

Three Eye-Opening Tweets

And finally, we close with three eye-opening tweets. 

Fascinating.

Lots of buy orders for Tesla stock, perhaps too many (see thread). 

Software and automation have their perks.

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Size matters. 

And the smaller, the better — so long as it doesn’t impact performance. 

Of course, we’re talking about electric vehicle batteries. 

The typical EV runs on a lithium-ion battery, which is neither cheap nor light. For instance, Tesla engines range between 1,000 and 1,700 pounds, whereas the standard V6 engine is about 450 pounds. Generally speaking, the heavier the car, the worse its fuel efficiency, so there's an inherent incentive to downsize. 

One solution is solid-state batteries. 

Lithium-ion battery packs contain hundreds of cells. While this is an oversimplification, there are three critical components of a lithium-ion cell: a cathode, anode, and electrolyte — the last of which is in a liquid state for commercially available EVs. 

There are several benefits to replacing liquid electrolytes with solid ones, but arguably the biggest is that it could allow for graphite anodes to be swapped out for lithium ones, creating what’s known as a solid-state lithium battery. Why is lithium preferred? Essentially, it has a much higher energy density and would conceivably require less material — so, picture a smaller, yet more powerful fuel cell. 

For the record, my degree and background are in finance — not any of the sciences. If you want a deeper explanation of the science behind solid-state batteries, I recommend this Better Batteries piece by Grayson Hoteling. 

The problem with solid-state lithium batteries is that no one’s been able to design one for commercialized use in EVs. Perhaps that’s changing. 

QuantumScape is developing an anodeless architecture and proprietary solid ceramic separator. Here’s the company’s overview of solid-state batteries and their technology, in case my explanation wasn’t clear enough: 

A solid-state lithium-metal battery is a battery that replaces the polymer separator used in conventional lithium-ion batteries with a solid-state separator. The replacement of the separator enables the carbon or silicon anode used in conventional lithium-ion batteries to be replaced with a lithium-metal anode. The lithium metal anode is more energy dense than conventional anodes, allowing the battery to store a greater amount of energy in the same volume. Some solid-state designs use excess lithium to form the anode, but the QuantumScape design is ‘anode-free’ in that the battery is manufactured anode free in a discharged state, and the anode forms in situ on the first charge.

How much potential does QuantumScape’s battery have? During a livestream presentation in December 2020, QuantumScape CEO Jagdeep Singh made a few eye-opening and potentially industry-shifting declarations: 

• QuantumScape’s batteries could recharge from 0% to 80% in about 15 minutes, which would cut the standard recharge time for most lithium-ion EV batteries in half. 

• QuantumScape’s batteries would have up to 80% more range relative to similarly sized EVs with lithium-ion batteries. 

• QuantumScape’s batteries could last hundreds of thousands of miles in a broad range of temperatures. 

Naturally, that caught the market’s attention, skyrocketing shares of $QS above $130 at the time. 

Although shares of QS have since retreated, it’s closer to making these initial claims a reality. This past December, QuantumScape delivered the first of three battery samples to its longstanding partner, Volkswagen. While it’s far from the finished product, it’s a step toward a commercialized battery. 

“The purpose of the A sample is for the customer to be able to validate that the battery can actually work as it’s supposed to work,” —Singh, via a CNBC interview last April

Next step: the B sample, which would be manufactured on a prototype assembly line and used in test cars. Initial estimates were that the B sample would take about 18 months to deliver, so add $QS to the watch list — especially since shares have fallen far below where they once stood. 

Three Eye-Opening Tweets

And finally, we close with three eye-opening tweets. 

It pays to be long-term oriented (usually).  

Teslas: better with age?

As they say, the stock market is forward-looking.

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Electric vehicles aren’t a new concept, nor are the lithium-ion batteries that power most of them. But it took until earlier this month for me to explore the science behind how they work, why lithium is so highly sought after, and potential opportunities/disruptions within the EV industry thanks to lithium advancements. 

Fortunately, I didn’t have to look very hard. 

Better Batteries, run by Grayson Hoteling, is all about — you guessed it — batteries. 

Grayson’s 2022-in-review post highlights his key articles for the year, but I’d like to share a few that were particularly helpful in my pursuit to understand lithium and its global appeal.

What batteries are made of:

Better Batteries

You're putting that in my phone!?

Graphic: Chemical and Engineering News Materials Matter You may be lucky enough to not constantly think about the chemistry of processes in things when you see them like me. Oh look there’s Snell’s law of refraction, did you know why a curveball curves, oh look lithium ions are moving from cathode to anode when plugged in. Just like most people don’t care…

Read more

4 years ago · 1 like · Grayson Hoteling

The lay of the EV land (including solid-state battery investments): 

Better Batteries

🔋EVs - Enormous Ventures

In December of 2021, the white house released their Electric Vehicle Charging Action Plan, in which they announced they have, “united automakers and autoworkers to drive American leadership forward on clean cars.” This will help them plan their ambitious target to reach…

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4 years ago · 3 likes · Grayson Hoteling

Why solid-state battery investments matter:

Better Batteries

🔋No More Liquids

If you’re reading this, I would really appreciate it if you pressed the heart button above …

Read more

4 years ago · 2 likes · Grayson Hoteling

Thanks for reading. Don’t forget to hit the heart button if you enjoyed today’s report.

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If this is your first time with us, don’t forget to subscribe here. If you enjoy today’s issue, please hit the heart button at the end of the report.

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Lithium batteries are very “in” right now. 

The question is, are they merely a trend that’s susceptible to disruption or permanent fixtures within manufacturing industries? 

Here’s McKinsey’s take on the matter:

Another question that arises is whether lithium can be substituted. Most grid storage applications have a queue of more or less developed technologies that could do the task: vanadium redox flow, zinc air, sodium sulphur, sodium nickel, and so on. However, there is currently no substitute for lithium to meet the demands of the mobility sector. The only potential alternative is sodium ion, which, when fully ready for use, will only be able to tackle low-performing applications. Given the foregoing, there is little risk of lithium demand decreasing by 2030. [emboldened for emphasis]

That’s good news for lithium fans (and mining operators, battery makers, EV manufacturers, etc.) because demand for this precious metal is expected to surpass three million tons by 2030, outpacing supply and creating a notable deficit. 

So, who’s going to bridge the gap? What current projects are either in development or pre-development phases? 

No single company could possibly address the entire supply shortage, but perhaps the best-positioned American mining operator is Albemarle Corp.

Albemarle recently secured approximately $150 million from the Department of Energy via the Bipartisan Infrastructure Law, supporting the company’s commercial-scale lithium concentrator facility in Kings Mountain, North Carolina. It’s also in the process of developing a “mega-flex” lithium conversion facility, which will convert spodumene concentrate into battery-grade lithium. 

Here’s more color from a press release:

The mega-flex conversion facility is expected to eventually produce up to 100,000 metric tons of battery-grade lithium per year to support domestic manufacturing of up to 1.6 million EVs per year. Albemarle is finalizing the site selection for the mega-flex conversion facility in the southeastern United States. That facility design would accommodate multiple feedstocks, including spodumene from the proposed reopening of the company's hard rock mine in Kings Mountain; its existing lithium brine resources in Silver Peak, Nevada, and other global resources; as well as potential recycled lithium materials from existing batteries.

For 2022, Albemarle’s lithium conversion capacity is expected to be 200 kilotons per annum (i.e., 200,000 tons). That said, by 2030, Abermarle’s annual capacity is projected to reach 450,000 to 500,000 thanks to in-development expansion projects as well as joint ventures in other countries like Australia, China, and Chile. 

Add $ALB to the list of lithium stocks to watch.

Three Eye-Opening Tweets

And finally, we close with three eye-opening tweets. 

LKAB, a Swedish mining company, finds the largest known rare-earth deposit in Europe.

Oh hello, Tesla. 

Too true for many investors these days. 

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In case you missed last week’s newsletter, we’re narrowing our scope to follow a simple investment theme: follow the money.

And who controls the most money? The government.

If Uncle Sam wants something to succeed, he has the power to throw ludicrous sums at the problem until it’s resolved. With that in mind, we’ll dive into industries that stand to benefit from public policies over the next decade.

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Free stock research

Without further ado…

Let’s take a stroll down memory lane. 

Think back to your middle school years, specifically science class. Remember when you learned about the periodic table of elements? Picture that group of segregated elements at the bottom of said table — you know, the ones with ridiculous names.

Pop quiz: Can you name one element from that group? 

Don’t worry if you can’t. 

While these elements may not stick out to you, these “lanthanides” and “actinides” are actually quite important. In fact, they’re pretty well represented within the National Defense Stockpile (NDS) — essentially, an emergency reserve of critical materials just in case international relations sour. For instance, if foreign suppliers voluntarily or involuntarily stopped trading with us (something China did to Japan in 2010), we wouldn’t be totally screwed.

The NDS was introduced near the beginning of WW2, escalated rapidly during the early stages of the Cold War, before slimming down by the time the Berlin Wall fell in 1989. 

Roughly three decades later, well, inventories are lower than when it was created. 

Considering our dependence on China for rare-earth elements has been labeled a national emergency, it’s about time to restock the stockpile. 

In late December, the Biden administration passed the National Defense Authorization Act. A small but notable portion ($1 billion) of the budget was earmarked for bolstering critical materials within the National Defense Stockpile. 

Those materials are:

1. Neodymium oxide, praseodymium oxide, and neodymium iron boron (NdFeB) magnet block.

2. Titanium.

3. Energetic materials.

4. Iso-molded graphite.

5. Grain-oriented electric steel.

6. Tire cord steel.

7. Cadmium zinc telluride.

8. Scandium.

These are valuable, highly-coveted elements, particularly neodymium oxide, praseodymium oxide, and NdFeB — and there aren’t many economical ways to acquire them, which is exactly why we have a stockpile. 

In fact, there’s only one operational REE mine in the great U.S. of A. 

And it belongs to MP Materials. 

MP Materials Could Benefit From the National Defense Authorization Act

MP Materials (MP) is a rare-earth mining company — the only one of its kind operating at scale in North America — that owns the Mountain Pass near Las Vegas, Nevada. 

If you aren’t familiar with the company, we dove into MP Materials in a DD report last April. 

The TLDR version boils down to three points:

The most sought-after and valuable REEs are neodymium (Nd) and praseodymium (Pr; together, NdPr or PrNd) — two key components of permanent magnets. 

MP is currently progressing through a three-stage process that will conclude with a vertically integrated operation, all the way from mining REEs to producing permanent magnets and selling them to manufacturers. 

[MP] is expected to produce 1,000 metric tons of finished NdFeB magnets (NdPr, iron, and boron) each year, which is enough material to power roughly 500,000 EV motors. And this would only account for roughly 10% of the company’s NdPr output, giving it much more runway to sell these magnets to other manufacturers. 

While it’s by no means a guarantee, the increased budget space for the National Defense Stockpile could be an opportunity to add the government as a key customer in 2023 — especially since the Department of Defense has already awarded MP a $35 million contract to build a processing facility. 

Three Eye-Opening Tweets

And finally, we close with three eye-opening tweets. 

A couple uncovered one of the largest lithium deposits — and can’t mine it legally.

Sigma Lithium, another stock to watch.

Auto loan defaults and repossessions inbound.

Thanks for reading. Don’t forget to hit the heart button if you enjoyed today’s report.

If you haven’t subscribed already, you can do so here.

If this is your first time with us, don’t forget to subscribe here. If you enjoy today’s issue, please hit the heart button at the end of the report.

Free stock research

Without further ado…

In 2023, we’re narrowing our scope to follow a simple investment theme: follow the money. 

And who controls the most money? The government.

If Uncle Sam wants something to succeed, he has the power to throw ludicrous sums at the problem until it’s resolved. With that in mind, we’ll dive into industries that stand to benefit from public policies over the next decade. For instance, under the Bipartisan Infrastructure Law, the US Department of Energy recently awarded $2.8 billion to a portfolio of 21 projects for the development of domestic battery facilities. 

One of those recipients was Piedmont Lithium, a lithium-mining startup that just upped its annual delivery to Tesla on Tuesday. 

Piedmont Lithium and Tesla Amend Offtake Agreement 

Electric vehicles run on rechargeable batteries. Those batteries are composed of a variety of metals, such as nickel, cobalt, possibly manganese — and lithium. 

While it’s a small component in the typical EV battery (roughly 10% by weight), it’s critical nonetheless. So, it’s no surprise that lithium demand is expected to greatly outpace supply in the coming years, supporting all-time-high prices for this metal. 

In September 2020, Tesla reached an agreement with Piedmont Lithium for roughly 53,000 metric tons of spodumene concentrate (high-purity lithium ore) each year through the end of 2025 (with an option to renew for another three years). Now, that annual delivery is up to 125,000 metric tons. 

Here’s commentary from Piedmont Lithium President and CEO Keith Phillips via a press release: 

“The electric vehicle and critical battery materials landscape has changed significantly since 2020 and this agreement reflects the importance of — and growing demand for — a North American lithium supply chain. This agreement helps to ensure that these critical resources from Quebec remain in North America and support the mission of the Inflation Reduction Act to bolster the U.S. supply chain, the clean energy economy, and global decarbonization.”

Piedmont Lithium has economic interests in lithium mines in Canada and Ghana, which are its current sources of spodumene concentrate. That said, not all lithium is created equal; this ore still needs to be refined further and converted into lithium hydroxide. The company is in the process of developing facilities in Tennessee (estimated completion in 2025) and North Carolina (2026) that will do just that. 

The US isn’t exactly a world leader when it comes to lithium production — it’s eighth behind a host of other countries, notably Australia, Chile, and China. 

Perhaps Piedmont Lithium will help close the gap. Add PLL to the watchlist. 

Three Eye-Opening Tweets

And finally, we close with three eye-opening tweets. 

That’s a lot of red.

A quick summary of critical trends for 2023, via BlackRock. 

Who needs profits?

Thanks for reading. Don’t forget to hit the heart button if you enjoyed today’s report.

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