Graphene Stock Investing: What The Pros Think

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 |  Includes: AIXG, BAM, ENS, JCI, SSNLF, TSLA
by: Tom Konrad, CFA

Graphene is a crystalline form of carbon in which carbon atoms are arranged in a regular hexagonal pattern. It is very strong, light, and an excellent conductor of heat and electricity. It is also nearly transparent. New laboratory techniques for creating large sheets of graphene, including a roll-to-roll production process, have triggered an explosion of research into new practical applications taking advantage of graphene's unique properties.

Some potential cleantech applications are solar cells, ultracapacitors, water filtration and desalination, and electronics including touch-screens and better transistors. Graphene's high electrical conductivity and near-transparency make it a good candidate for solar cells. Researchers have demonstrated the use of graphene conductors for dye-sensitized, organic solar cells, and silicon nanostructures.

While roll-to-roll production processes have yet to move out of the lab, researchers continue to improve the quality and size of graphene sheets produced in this way. The most advanced version of the technology seems to be vapor deposition of carbon on copper sheets. Other substrates have been used, but copper's flexibility makes it uniquely suitable for roll-to-roll production. Lockheed Martin (NYSE:LMT) announced that it has obtained a patent for perforated graphene nanopore-based water filters in March, and also produces its graphene on copper sheets. The company has not yet commercialized the technology, however, saying that it is still figuring out how to scale up production. Lockheed aims to have a prototype for testing in a desalination plant by 2014 or 2015.

One of the closest applications to commercialization is graphene ink used to lay down circuitry. BASF SE (OTCQX:BFFAF) is experimenting with graphene ink for printing flexible circuitry on car seats, something it hopes to commercialize in a few years.

Last week, I asked my panel of green money managers for their thoughts on investing in graphene, as well as polling my readers. I'll relay the professional's ideas in the rest of this article, and then take a look at my readers' responses in a follow-up article. The reader poll is ongoing (you can take it here.)

Green Mutual Fund Managers

I received thoughtful responses from two managers of green mutual funds, Garvin Jabusch and Frank Morris. Jabusch is co-founder and chief investment officer of Green Alpha Advisors and co-manager of the Shelton Green Alpha Fund (NEXTX.) NEXTX invests in companies focused on solutions to the world's key climatic-macroeconomic issues such as climate change, resource constraints and global production capacities.

Morris is co-founder of Ecologic Advisors and manages the Epiphany Global Ecologic Mutual Fund EPENX. EPENX has a more diversified focus, and concentrates on companies that provide goods and services that maintain the ecologic health and viability of the Earth, or remediate damage already done. I asked them each which graphene cleantech applications they thought were most promising, the commercialization timeline, and their ideas for stock market investments.

Top Applications

Jabusch says "[I]t's hard not to be bullish on the long term prospects for graphene as a material." In particular,

Graphene has unmatched capabilities in both electronic and material/mechanical capacities. For example, it has the ability to convert almost every photon that it absorbs into direct current, meaning theoretically it could be used to make the holy grail of solar cells – one that is 100% efficient. This unmatched conductivity also means it could greatly improve energy storage and transmission, meaning everything from EVs (batteries and super-capacitors, etc.) to large-scale grid storage to transmission efficiencies of power and optical communications, and other infrastructure components may become so much better as to be disruptive to existing approaches to all these things. Graphene's ability to be formed into nanowires means it may provide the smallest and most size and speed efficient circuitry for electronics and LEDs to date, by far. Graphene is the strongest material ever measured, ~200x stronger than steel, making it extremely light and resilient, offering the possibility of making many things we use, from vehicle chassis to airframes both lighter and more durable, like carbon fiber did decades before. At one molecule thick, it is also transparent, meaning it offers possibilities in touch screens and displays and means that windows may become PV modules in time.

Morris focused only on its energy storage applications, and thinks that three firms in his Global Ecologic Mutual Fund are all researching its potential: EnerSys (NYSE:ENS), Tesla Motors (NASD:TSLA) and Johnson Controls (NYSE:JCI).

From my recent reading, I'm most optimistic about graphene's applications as a thin, transparent conductor in solar and LED lighting applications. Its ability to both conduct electricity and dissipate heat seem likely to be very useful for LEDs. Graphene circuitry in devices where size and weight are critical also seems likely to be an early application, but are more likely to bring incremental improvement than revolutionary change.

Commercialization Timeline

Both Morris and Jabusch were cautious about predicting any commercialization timeline. Jabusch said,

[W]idespread commercial viability of [graphene's] properties may still be further off than many investors seem to be hoping. This is mainly because a lot of its benefits are paired with limitations that to greater or lesser degrees, still need to be overcome. For example, even though it has 100% energy conversion rate for absorbed photons, it only absorbs ~3% of photons striking it. There is a lot of research going on addressing this such as with dye-sensitized cells and other ideas, but all of this is primarily still in the lab and not ready for widespread use. Keep in mind, graphene was only discovered in 2004. Something we've been aware of for less than a decade will necessarily have a long way to go in terms of our understanding how to best unlock its potential.

This caution fits well with the results of my research. A Wall Street Journal article printed cautionary notes from two industry experts,

Graphene faces hurdles. It is still far too expensive for mass markets, it doesn't lend itself to use in some computer-chip circuitry and scientists are still trying to find better ways to turn it into usable form. "Graphene is a complicated technology to deliver," says Quentin Tannock, chairman of Cambridge Intellectual Property, a U.K. research firm. "The race to find value is more of a marathon than a sprint."

One factor holding graphene back is cost. Some U.S. vendors are selling a layer of graphene on copper foil for about $60 a square inch. "It needs to be around one dollar per square inch for high-end electronic applications such as fast transistors, and for less than 10 cents per square inch for touch-screen displays," estimates Kenneth Teo, a director at the Cambridge unit of Germany's Aixtron SE (NASD:AIXG) that makes machines to produce graphene.

Top Stocks

While Morris mentioned three companies he thought might be researching graphene, he was cautious not to predict any near-term measurable benefits. With all of us expecting commercialization timeliness of at least three years, it's premature to start picking stock market winners. Jabush likens it to investing in biotech in the early 1990s, saying that it makes more sense to hold a basket of the most promising companies, especially those hedged by not having graphene as their entire business.

He said his basket might "include Aixatron (NASD:AIXG; also makes deposition and other equipment used in making PV and LED), Samsung (OTC:OTC:SSNLF; has many other well-known businesses, many of which may directly benefit from graphene integration), and Graftech International (NYSE:GTI; legacy graphite and coke-needle business now focusing more on patenting graphene IP, and production of the material). We're long AIXG and GTI, and may initiate an SSNLF position. Note: I'm also long GTI.

Proceed with Caution

Graphene is undeniably exciting, and has the potential to transform a number of cleantech industries. The timeline for that transformation, however, is likely to be slower than investors bidding up graphene-related stocks today. The only reason I own Graftech, mentioned above, is because I think it is undervalued on the basis of its existing businesses: manufacturing graphite electrodes for energy efficient electric arc furnaces, and its existing Engineered Solutions business, which sells a variety of graphite based solutions to a range of cleantech businesses.

Jabush is more optimistic, and thinks "careful investments in the best graphene producers and even more careful selection of companies making early efforts at application of the material have outstanding long term growth potential."

Note the double use of the word "careful."

This article was first published on the author's Forbes.com blog, Green Stocks on September 18th and Graphene Stock Investing: What The Pros Think was posted on AltEnergyStocks.com.

Disclosure: Long GTI

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.