Tesla Motors Inc. (TSLA)’s Growth Is Pushing Hedge Funds Towards Lithium Stocks

Undoubtedly, Tesla Motors Inc. (NASDAQ:TSLA) has been a major disruptor in the auto industry with its battery-operated cars, but the electric car maker has been shaking up metal markets as well. Tesla and other electric-vehicle makers are viewed as the major factor in the growing demand for lithium in the upcoming years and decades. Lithium is a lightweight material called the “white petroleum” for its use in lithium-ion batteries that power electric vehicles. Some even recommend forgetting about gold investing and suggest channeling capital into lithium instead.

A recent report from Goldman Sachs shows that lithium demand could triple to 570,000 tons by 2025, mainly reflecting strong demand for smartphone and electric-car applications. Although Tesla Motors is not the only consumer of lithium, its insatiable appetite for lithium has received a great deal of attention. The California-based company anticipates to sell 500,000 cars worldwide by 2018 and its 2020 production is anticipated to reach one million vehicles. “In order to produce half a million cars a year…we would basically need to absorb the entire world’s lithium-ion production,” said Elon Musk at the unveiling of the Tesla 3 model in late March. Despite the intensifying excitement and discussions around Tesla’s Gigafactory, some expect Asia to remain the primary engine for lithium demand in the foreseeable future. Either way, Insider Monkey decided to complie a list of lithium stocks favored by the hedge funds that comprise our database.

At Insider Monkey, we track around 740 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).

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Let’s kick off our discussion by having a quick look at the hedge fund sentiment towards on the major growth engines for lithium demand in recent years, Tesla Motors Inc. (NASDAQ:TSLA). The number of hedge funds followed by Insider Monkey invested in Tesla Motors Inc. (NASDAQ:TSLA) fell to 36 from 39 during the second quarter. Meanwhile, the overall value of those hedge funds’ equity investments in the electric-car maker rose by around 5% quarter-over-quarter to $1.13 billion despite a decline of 7% in the value of Tesla shares, so some smart money investors increased their exposure to the highly scrutinized company. Tesla’s stock is a lot more expensive than the shares of other car-makers, but Tesla investors are willing to disregard the discrepancy as long as Tesla’s growth strategy remains intact. A recent survey conducted by UBS showed that high-income individuals (with annual income higher than $100,000) strongly prefer other luxury and quasi-luxury brands over Tesla. In the meantime, 13-31% of survey respondents said they were likely to choose an incumbent brand, as compared to 41-52% who would choose Tesla. However, as high-income households are more inclined to purchase a Tesla car, the results from the survey point to the fact that the California-based electric-car maker will face serious competition as other manufacturers are launching their own electric-vehicle models. Tesla shares are 13% in the red thus far in 2016. John Griffin’s Blue Ridge Capital owns 191,237 shares of Tesla Motors Inc. (NASDAQ:TSLA) as of the end of the second quarter.

Let’s head to the next to pages of this article, where we reveal a set of favorite lithium stocks among the hedge funds followed by our team in decreasing order. Starting with the least favorite and ending with the most favorite.

#4. Sociedad Quimica y Minera de Chile (ADR) (NYSE:SQM)

– Hedge Funds with Long Positions (as of June 30): 17

– Value of Hedge Funds’ Holdings (as of June 30): $79.11 Million

Sociedad Quimica y Minera de Chile (ADR) (NYSE:SQM) received a great deal of attention from the segment of the hedge fund industry monitored by our team during the second quarter, as the number of funds with long positions in the company jumped to 17 from 11 quarter-on-quarter. The aggregate value of those positions increased by 47% quarter-over-quarter to $79.11million, partly due to a 23% increase in the value of SQM’s American Depositary Shares. The integrated producer of specialty plant nutrients, iodine, lithium, potassium-related fertilizers and industrial chemicals has seen the value of its ADS increase by 35% since the beginning of the year. Earlier this month, Sociedad Quimica y Minera de Chile announced plans to increase its lithium hydroxide capacity in Chile from 6,000 metric tons per year to 13,500 metric tons per year, citing market demand growth. SQM plans to increase efficiencies at its current facility near Antofagasta, which will increase the current plant capacity to 6,500 metric tons per year from 6,000 metric tons per year. Moreover, the company also plans to build a new plant with a capacity of 7,000 metric tons per year. Steven Cohen’s Point72 Asset Management added a 595,400-share stake in Sociedad Quimica y Minera de Chile (ADR) (NYSE:SQM) to its portfolio during the second quarter.

#3. EnerSys (NYSE:ENS)

– Hedge Funds with Long Positions (as of June 30): 22

– Value of Hedge Funds’ Holdings (as of June 30): $102.28 Million

The hedge fund sentiment towards EnerSys (NYSE:ENS) increased during the April-to-June period, given that the number of asset managers from our system with stakes in the company rose to 22 from 14 quarter-over-quarter. Similarly, the overall value of those stakes increased by 62% quarter-on-quarter to $102.28 million, also reflecting an increase of 7% in the value of EnerSys shares. While Tesla’s promising growth appears to represent a strong catalyst for lithium producers, EnerSys might represent a loser as a result of Tesla’s aggressive move to capitalize on increased demand in the backup power, stationary storage, and grid-level end-markets (Tesla’s world’s largest battery-making facility will not solely target the electrical-vehicle market). EnerSys, the world’s largest manufacturer, marketer and distributor of industrial batteries, has seen its market capitalization rise by 21% year-to-date. Will Tesla’s Gigafactory be a disruptive game-changer for competitors such as EnerSys? Only time will tell. Royce & Associates, founded by Chuck Royce, reported ownership of 689,900 shares of EnerSys (NYSE:ENS) in its 13F for the second quarter.

#2. FMC Corp (NYSE:FMC)

– Hedge Funds with Long Positions (as of June 30): 37

– Value of Hedge Funds’ Holdings (as of June 30): $1.09 Billion

There were 37 asset managers tracked by Insider Monkey with equity investments in FMC Corp (NYSE:FMC) at the end of the June quarter, as compared to a mere 22 recorded at the end of the previous quarter. The overall value of those equity investments spiked by 28% quarter-over-quarter to $1.09 billion, partially due to a 15% gain in the value of FMC shares. The 37 asset managers amassed around 18% of the company’s total number of outstanding shares. FMC manufactures lithium for use in a broad array of products used in energy storage, specialty polymers and chemical synthesis application through its FMC Lithium segment. In May, FMC announced plans to triple its production of lithium hydroxide to 30,000 metric tons by 2019 after signing a new supply agreement with a major manufacturer of electric cars. FMC is one of the four largest producers of lithium, three of which are discussed in this article, that collectively control approximately 90% of the market. Shares of FMC are up 24% thus far in 2016. David Fear’s Thunderbird Partners was the owner of 2.68 million shares of FMC Corp (NYSE:FMC) at the end of June.

#1. Albemarle Corporation (NYSE:ALB)

– Hedge Funds with Long Positions (as of June 30): 40

– Value of Hedge Funds’ Holdings (as of June 30): $1.06 Billion

The number of smart money investors with long positions in Albemarle Corporation (NYSE:ALB) increased to 40 from 28 during the June quarter, while the overall value of those positions rose by an impressive 80% quarter-over-quarter to $1.06 billion. The increase was partly driven by a 24% gain in the value of Albemarle shares. The 40 hedge fund firms invested in Albemarle accumulated around 12% of the company’s common stock. The leading global developer, manufacturer and marketer of highly-engineered specialty chemicals reported net sales from lithium and advanced materials of $233.35 million for the three months that ended June 30, up from $213.00 million posted for the same period of the prior year. Albemarle’s management team anticipates that the demand for lithium will keep growing due to new applications for lithium power, as well as due to the accelerating use of plug-in hybrid electric vehicles and battery electric vehicles. Albemarle has seen its market cap gain 44% since the start of the year. Iridian Asset Management, founded by David Cohen and Harold Levy, owned 2.50 million shares of Albemarle Corporation (NYSE:ALB) on June 30.

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