What does the Schumer-Manchin climate deal mean for TSLA stocks?

This article is excerpted from Tom Yeung’s Profit & Protection newsletter dated August 4, 2022. To make sure you don’t miss a thing of Tom’s picks, subscribe to his mailing list here.

Happy birthday George Jetson!

Over the weekend, memes circulated that July 31 marked the birthday of The Jetson patriarch.

Maybe flying cars are next, notes Luke Lango.

And Luke may be right. Today’s eVTOL makers are advancing so rapidly that hovering vehicles may one day be as ordinary as today’s smartphones. (I am personally waiting for a robot housekeeper).

The same is starting to happen with electric vehicles (EVs). Last week, Senate Majority Leader Chuck Schumer and Sen. Joe Manchin unveiled their bill that would provide a $7,500 tax credit to any American who buys an electric vehicle. The agreement would also remove the phasing out of 200,000 vehicles that currently makes General Motors (NYSE:GM) and You’re here (NASDAQ:TSLA) not eligible for credit.

A 2023 Chevy Bolt could cost as little as $18,100 if the deal reaches the Senate.

This would be a game-changer for the adoption of electric vehicles. Only five other car models tracked by US News and World Report have an MSRP below this figure. And that includes the Mitsubishi Mirage, a car so bad that Car and Driver gave it a 2.5/10 for its “lazy” acceleration and “rudimentary” interiors.

Meanwhile, a Jetson-style future looms. General Motors’ Bolt is already getting good reviews for its “surprisingly spacious interior” and “energetic response.” A price drop will make it one of the few new cars available under $20,000.

Is the Cut Inflation Act bad news for TSLA stocks?

The Cut Inflation Act tax credit, however, will make much less of a difference to TSLA stock and other high-end electric vehicle makers. The legislation is phasing out credits for sedans and wagons at $55,000 and SUVs at $80,000. None of Tesla’s current models would make the cut.

Moving down the market will also be a challenge. Toyota (NYSE:MT) and General Motors already produce about 10 million vehicles a year, giving them huge scale in cheaper vehicles. A tangle of local and state laws in the United States also creates barriers to opening new dealerships; new entrants from Indian group Tata to Chinese brands SAIC have struggled to break into the US market.

These are problems for Tesla’s long-term growth potential, as well as for high-end competitors Lucid Engines (NASDAQ:LCID), Faraday’s future (NASDAQ:FIE) and Fisker (NYSE:FSR). Unlike the iPhone, where expensive models always cost less than the average performance laptop, high-end EVs are prohibitively expensive for all but the wealthiest Americans. Monthly payments for new Model S cars exceed $2,000 — a figure that requires between $250,000 and $350,000 in annual income to comfortably afford, according to financial planning professionals. The tax credit will further widen this gap.

The bill won’t kill TSLA stocks. But this will certainly limit its growth potential by helping low-cost competitors.

The winners of the Schumer-Manchin agreement

So who wins the Senate’s $350 billion spent on greening the US economy?

In a sense, financially stable consumers have everything to gain. The Schumer-Manchin deal not only offers a $7,500 tax credit to EV buyers. In its current form, the bill also expands solar panel tax credits and creates a $4,000 tax credit for used electric vehicles. A drug price agreement could also cap Medicare payments at $2,000 in out-of-pocket payments.

But the effect for investors is more complex, especially for electric vehicle manufacturers. (Critics of the bill will note that it raises taxes on middle-income families and does little to reduce inflation). The 10-year, $10 billion investment tax credit for clean-tech manufacturing facilities will be diluted among dozens of players; General Motors alone generated this profit figure in 2021. And if each existing player receives a pro-rated amount from the fund, the tax benefits quickly become a zero-sum game.

This is why pick and shovel type parts have generally outperformed their vehicle producing counterparts. Companies like the Battery Research Company QuantumScape (NYSE:QS) saw its stock price top $12 for the first time in two months on the announcement. And struggling solar company sunrun (NYSE:SUN) would see stocks jump almost 40% when the bill is announced.

And this is where an investment in Lithium Americas (NYSE:LAKE) Between.

The “Picks-and-Shovels” game for the electric vehicle industry

Lithium Americas is a winning combination of security and growth for the Benefit & Protection listing. Unlike QuantumScape and other start-up companies (i.e. zero-income companies), LAC will produce lithium, an ingredient already used in current production. As mentioned in Friday’s newsletter, “Lithium Americas is a safer way to play the EV boom.”

Indeed, no matter which electric vehicle manufacturer comes out on top, each car will still need 5 to 15 kg of lithium metal to produce.

At the same time, LAC still has more advantages than its rival Sociedad Quimica y Minera de Chile (NYSE:M²) and other established lithium miners. LAC is still a start-up with three projects in its pipeline and is trading at a gaping “uncertainty discount” for this sin. Morningstar analysts peg LAC’s fair value at $65, up 160% even after factoring in start-up risks.

That said, LAC has some issues. Its Nevada mine at Thacker Pass has been dogged by lawsuits from activists, despite approval from the Trump and Biden administrations. And it’s still unclear if the company’s Argentinian resources will be eligible for upcoming clean energy tax credits.

Still, for those looking for startup-like returns, LAC offers much better downside protection thanks to its potentially inexpensive production and insatiable global demand for battery materials.

Click here to learn more about Lithium Americas.

Another electric vehicle game “Moonshot”

Luke Lango also took a close look at the winners of the electric vehicle revolution. And a small business caught his eye.

It’s not Lucid Motors…

It’s not Tesla either…

Instead, it’s an under-the-radar startup potentially helping Apple create its next trillion-dollar blockbuster. And to see Luke’s presentation, Click here.

The Inevitability of Combustion Engine Phaseouts

Even the Jetsons knew that fossil fuels would eventually die out. Every oil field…every gas project…every fossil fuel reserve has a finite lifespan. Europe’s North Sea oil fields are producing less than a third of what they once produced in the late 1990s as the fields eventually run out. Even today’s advanced fracturing technology will eventually drain the US Permian Basin.

In its place, vehicles will need a high-density power source.

Some believe hydrogen fuels are the answer. And the technology will have its place in transportation, especially where high-use vehicles like forklifts and taxis don’t have time to recharge.

But for the remaining 90% of electric vehicles, lithium-ion technology reigns supreme. And investors who get into companies like Lithium Americas early are the ones who stand to gain.

Tom Yeung is the editor of Profit & Protection, a free e-newsletter about investing for earning profits in good times and protecting gains in bad times. To join Profit & Protection – and claim a free copy of Tom’s latest report – head here to sign up for free!