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I rarely invest in things. I find ideas much more interesting. And with gas prices about to top $4 per gallon, the idea of electric cars is, once again, appealing.

Let's be honest - electric cars aren't a “thing” yet. They're a niche. As the Financial Times noted last month:

In their first full year of sales, both Nissan’s (OTCPK:NSANF) Leaf and General Motors’ (GM)Chevrolet Volt — the first of a new generation of cars powered by rechargeable batteries — have sold in smaller numbers than the two carmakers expected: about 30,000.

One of the things I've learned in this business is that profits are real whether they come from actual sales or anticipated ones, whether the latter materialize or not. What I mean by that is when gas prices climb, a logical thought extension is that sales of fuel-efficient vehicles will rise. In the market's equivalent of a gut reaction, stocks related to the production of efficient vehicles will rise.

But let me make this clear: It makes no difference whether or not electric vehicle sales rise. I don't have a vested interested in electric vehicle sales one way or another. What I have a vested interest in is making you money. And the money that can be made by playing the market's anticipation is real. The outcome of that anticipation is irrelevant. Getting ahead of it is key.

Projected Sales

Here's another piece of that same Financial Times article:

The modest initial sales of EVs are largely a result of the small number of models on the market, which will grow from 2012 as Toyota (TM), Renault, BMW, Daimler, and other manufacturers launch electric or plug-in hybrid cars.

Nevertheless, many analysts, even those who are confident that EVs will be viable long-term alternatives to conventional cars, are cutting their sales forecasts because of slow initial uptake of the first models to come to market.

Adam Jonas, a Morgan Stanley analyst, concluded that EVs were “not ready for prime time”, and reduced his expectation of their market penetration in 2025 to 4.5 per cent, from 8.6 per cent before.

I see the same sentiment elsewhere.

J.D. Power & Associates thinks all-electric vehicles will be less than 1% of U.S. auto sales in 2018. It jumps to 8% when hybrids and plug-in hybrids are included.

For perspective, at 8% market share the electric vehicle industry represents about half of one slice of a large pizza. At 1% it represents a piece of pepperoni.

That's not a mecca or a paradigm shift or a lion's share; it's a decent start.

And it's why a chart of the most widely-tracked lithium fund on the market looked like this from January to December 2011, losing 40% compared to the Dow's flat trajectory.

Global Lithium ETF 2011

Anticipating Anticipation

Fast-forward to January of this year: Oil is starting to climb. Gas prices are rising with it. The low market penetration forecasts for electric vehicles remains unchanged — only now, the market is irrationally expecting higher electric car sales because of higher gas prices.

Take a look at a chart of that same lithium ETF for the first two months of 2012:

Global Lithium ETF 2012

What a difference sentiment can make.

I like to think of scenarios like this as an inherent psychological flaw in the market. And I take great pride in being able to exploit them for profit. That lithium ETF is trading around $17 now, but could run to $20 on a continued rise in gas prices before it runs into resistance. It could be a nice 18% win just for anticipating anticipation.

What to Expect Next

I know why the market share of electric vehicles has been slow to take off. Even the most ardent EV supporters know in their heart of hearts why consumers aren't yet flocking to battery-powered cars. Allow me to illustrate this for you via a story I came across on The Motley Fool...

The author and his wife were in the market for a hybrid or electric vehicle. They ended up buying the Volt. But his explanation why is what will deliver the next round of profits from this sector:

Why did we go with the Volt over Nissan's Leaf or save up to splurge on Tesla's (TSLA) Model S sedan that hits the market in July? As a Ford (F) investor — and owner myself — I could've gotten a shareholder discount on the all-electric Focus model that will be coming out in a few months. Why did we pass?

Range anxiety.

All-electric cars are still limited by the range of their lithium-ion batteries. The Leaf has a range of 100 miles on a single charge. Tesla's entry-level Model S tops off at 160 miles, and it will cost drivers $70,000 for the Model S with the upgraded battery to get 300 miles between charges.

It was the fear of taking the car out on a family road trip that nixed the all-electrics from our checklist. Gas stations are plentiful. Electric charging stations are still few and far between.

The only thing that can change that is batteries. And so that's where the next round of innovation — and investment — has to be.

Lithium-ion batteries will be improved by adding other metals and minerals in various combinations. Sodium, sulfur, vanadium, zinc, rare earths, and more are all being tested as ways to increase the amount of energy modern batteries can store. I don't know which technology will win.

But I do know that as the search continues, the market will start to look at battery materials the way it's currently looking at lithium in the wake of high gas prices. It will anticipate higher prices for future battery materials, and related stocks will rise.

That's why when it comes to batteries, I'm betting on metal providers, not technology companies.

Source: Betting On Electric Cars? Invest In Lithium