Tom Konrad CFA
Graphene is going to transform clean tech in less than five years.
That, at least, is the opinion of the majority of the respondents to my reader poll about how graphene is likely to affect clean tech stocks. This is in marked contrast to the caution expressed by the the responses from my panel of professional money managers who invest in clean tech stocks. (Their responses are the subject of a previous article on graphene investing.)
I think Shawn Kravetz, President of Esplanade Capital, LLC, and manager of solar-focused hedge fund Electron Partners, LP exemplifies the panelists’ attitude towards greaphene’s likely impact on their investments: “I must respectfully pass on this one. Ignorance is indeed bliss in this case.” Technologies, like graphene, which are still in the lab, won’t have much impact on stocks’ performance until they are commercialized and can start contributing to a company’s revenue. Commercialization usually takes much longer than innovators and many investors think.
Flexible Graphene Sheet image via BigStock
In my research, I found many companies which are developing graphene applications, and rushing to patent the results. Most of these applications are still years from producing measurable revenue. One example from my previous article was(NYSE:LMT) patent on graphene water filters in March. Lockheed clearly has the financing and brand name needed to commercialize this application quickly, but only says that it aims to have a prototype ready for testing by 2014 or 2015. That puts the launch of a commercial product at least another three years beyond that, to give time for adequate testing an manufacturing scale-up at least five years out.
Perhaps other applications can be commercialized more quickly, but the “less than a year” or “1 to 2 years” responses to my poll seem very unrealistic, unless we are talking about inks and other applications of graphene powder, which is just normal graphite exfoliated into tiny molecule-thick sheets, lacking many of the properties of large graphene sheets which make graphene exciting in the first place.
Graphene… From Graphite Flakes
I was contacted by the Corporate Communications officer of Grafoid, Inc in response to my poll and upcoming articles, and later did a short interview with its CEO, Gary Economo. Grafoid describes itself as “a privately held Canadian graphene development and investment company,” 21% owned by Focus Graphite, Inc. (TSX-V:FMS, OTC:FCSMF,) a junior mining firm which owns the high grade Lac Knife graphite property in Quebec, Canada. It was previously known as Focus Metals, but changed its name to Focus Graphite in 2012.
Grafoid’s signature product is MesoGraf™, a range of trademarked bilayer and trilayer graphene product created from graphite ore using a “novel chemical exfoliation and transformation process.” I am skeptical of graphene refined from graphite, because most of the potentially revolutionary applications for graphene require the use of large sheets of graphene, and established companies and researchers seem focused on creating graphene by vapor deposition.
In terms of applications, Grafoid’s projects are in the laboratory stage, and they include a graphene cathode for a patent-pending improved lithium ferrophosphate (LFP) battery developed Hydro-Quebec. Grafoid is also doing research into highly conductive, energy absorbent, and strong plastics made using graphene as an additive. Grafoid has applied for patents on its mixing process, which Economo says is the key to getting high quality graphene infused plastics.
He also told me that Grafoid is able to create large, (“as big as a table”) well structured sheets of graphene from MesoGraf, although he did not mention any applications of MesoGraf using large sheets made in this way. If scalable and the sheets are of controllable quality, such sheets would open the door to most graphene applications.
My reaction to Grafoid is “too good to be true.” It’s my experience that the time between success in the laboratory (which is where both companies seem to be with their graphene) and a commercial product is measured in years. The road to commercialization is long (unless it is a dead end) and typically requires repeated rounds of financing which often leave small investors owning little of the final product.
A similar company to Focus Graphite, Lomiko Metals Inc. (TSX-V:FMS, OTC:FCSMF) was recently in the news for having turned graphite into “graphene oxide.” (Grafoid also says it can also easily oxidize MesoGraf.) The graphene supercapacitors which made headlines last March were made from graphene oxide using the laser from a DVD burner.
A company representative left a comment on my previous post saying the company is
[W]orking closely with Glabs [Graphene Laboratories of Calverton, NY] to develop supercapacitors and other devices and ideas using graphene converted from natural flake graphite we find in Quebec. The connection between graphite and graphene on a scientific level is large. However the some of the amazing properties of graphene can be found in graphene nanoplatelets. Imagine graphene to be a pristine, smooth plywood sheet and nanoplatelets a particle board or cork board formation. This structure may increase conductivity but reduce strength and make the substance useful in battery and supercapacitor applications (which we are working on). As you know, there are more than 9000 patents for graphene. There is enough flake graphite resources to supply the creation of an industry based on graphene. But few are working on the pinch point of the hourglass – the conversion technology. That is what Lomiko and Glabs would like to create graphite and graphene substances that focus on one or two of the qualities of graphene – strength, conductivity, or elasticity and produce it for pennies pe
r gram. Current costs of $ 100 – $1000 per gram are prohibitive for production purposes.
According to my professional investor panel and several respondents to my poll, suppliers of graphene like Lomiko and Focus Graphite, as well as associated production equipment such as Aixtron (NASD:AIX) and CVD Equipment Corporation (NASD: CVV) because of their ability to benefit from a broad range of commercial applications.
However, given the early stage of Grafoid’s and Lomiko’s research, I believe these two companies should only be considered as investments on the basis of the value of their graphite mines. Graphite will have value whether or not it turns out to be a practical source of graphene feedstock. If these companies can be bought at attractive valuations based only on their mining assets, then graphene may provide a potential long-term upside.
As with commercial graphene applications discussed in the previous section, investors need to realize that the commercialization of graphene from graphite technology will be a very long haul if it is not a dead end, and invest accordingly.
Effects on Cleantech Stocks
Considering the effect on an industry’s competitive landscape is very useful to understanding have a new technology might affect stocks in that industry. An industry will benefit if the technology makes its suppliers’ markets more competitive, while they will be hurt if new competitors are likely to emerge using this technology, making the markets for its products more competitive.
Many investors tend assume that if a new technology has application to an industry, it will help the stocks in that industry. This is seldom the case. Consider, for instance, the effect of First Solar’s (NASD:FSLR) thin-film CdTe photovoltaic technology on incumbent solar companies. By producing solar panels at a lower cost per watt than its competitors, First Solar reduced the margins of these competitors as it scaled up production by pushing the price of solar panels down. Meanwhile, all solar manufacturers’ customers benefited. The market for solar exploded as solar installers, developers, and their customers took advantage of rapidly falling prices.
In the case of graphene, the top applications suggested by readers were Solar Cells, Ultracapactiors, Batteries, Electronics, protective coatings, and water filtration. If this is correct, the biggest beneficiaries should be those industries which use these products.
Cheaper and better ultracapacitors and batteries should help electric vehicle companies, their customers, while likely harming electricity storage incumbents (competitors.) Poll respondents identified electric vehicles as the most likely sector to be helped (88%) and least likely to be hurt (0%), but were also bullish about utracapacitor stocks (83% helped, 8% harmed) and battery stocks (70% helped, 18% harmed.)
Variable electricity generation technologies such as Solar and Wind might be helped by cheaper energy storage which could make it easier to integrate these resources into the electric grid, but wind stocks are much more likely to be helped than solar stocks. Wind companies, unlike solar companies, are unlikely to see new competitors emerge using graphene based technology, but ultracapacitors are used in the electronics of wind turbines.
Companies which may supply companies using graphene technology may also benefit from new markets for their products.
With wind and solar sectors, my respondents seem to have the relative effects of graphene reversed (after correcting for the general bullishness.) Most (79%) of my poll respondents thought solar stocks would be helped, compared to only 10% who thought they would be harmed, while 30% thought wind stocks would be helped compared to 26% who thought they might be harmed.
These poll results most likely arise from the assumption that a technology which helps an industry produce better products will help the existing companies in that industry. As I discussed above, this assumption is most likely false. A new technology only helps existing companies is when they manage to commercialize the new technology before start-ups or competitors from other industries do. But existing companies tend to be bad at such innovation because of a reluctance to undercut their existing lines of business.
Given my skepticism of my poll respondents’ accuracy in picking cleantech sectors, their stock picks should be approached with caution. Below are their suggestions, organized by sector, for those looking for ideas and ready to do some serious due diligence.
Companies with graphene patents:
- BASF (OTC:BASFY)
- Lockheed Martin (NYSE:LMT)
- IBM (NYSE:IBM)
- Nokia (NYSE:NOK)
- AT&T (NYSE:T)
- Verizon (NYSE:VZ)
- Tesla Motors (NASD:TSLA)
- Maxwell Technologies (NASD:MXWL – Note: I am short this stock.)
While these companies may be helped, the effect on their stocks is likely to be small because of their large and diverse existing operations in other businesses.
The exception in this group is Maxwell – it might be helped a lot if it can commercialize graphene capacitors before anyone else does, but it could also be harmed if another company gets there first. Maxwell has been an active researcher in the graphene space, but management does not typically mention graphene in its MD&A, which leads me to believe that any graphene ultracapacitor from MXWL is years away. On the other hand, Maxwell’s management tends to play things very close to the chest. They may surprise me.
Potential Graphene and Equipment Suppliers
- Aixtron SE (NASD:AIXG)
- CVD Equipment Corporation (NASD: CVV)
I consider this group the best bets, if bought at reasonable valuations based on their current businesses.
Graphene from flake graphite suppliers
- Lomiko Metals (TSXV:LMR, OTC:LMRMF)
- Focus Graphite (TSX-V:FMS, OTC:FCSMF)
Best bought only based on mine valuations. Graphene might eventually provide some upside.
I think the strongest take-away from my reader poll is that cleantech investors expect too much from graphene, and expect it too soon.
Even more than the sector breakdown, the number of poll respondents who think existing cleantech stocks will be helped rather than harmed or unaffected by graphene technology should be a warning sign to prospective graphene stock market investors. Investor enthusiasm often draws stock promoters, so a company branding itself as a “graphene stock” should be a warning sign in and of itself. Even if a company has a real way to profit from graphene technology, that technology’s popularity is likely to mean the stock will be overpriced.
DISCLOSURE: Short MXWL
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investm
ent advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.