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.
Timeline
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
Lockheed Martin‘s (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 per 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.
Stock Picks
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.
Conclusion
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
This article was first
published on the author's Green Stocks
blog on Forbes.com on September 24th.
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
investment 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.