A Basket of Green Stocks to Buy

NEW YORK (TheStreet) --

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What We Mean by "Green Stocks": Lithium battery makers and companies further up the supply chain

Why Buy Them: Lithium batteries -- already growing increasingly popular for powering numerous electronic devices -- are expected to accelerate in popularity with the growth of electric or "green" vehicle demand, currently being driven by governments globally through incentive programs. Several governments aim to deploy no fewer than 1 million electric vehicles.

Needham investment firm's research suggests that the lithium-ion passenger vehicle market could accelerate to an estimated $24.7 billion by 2015 from about $200 million in 2010. This forecast is based on announced vehicle build rates and factors in battery-pack size and cost-reduction estimates to reflect economics of scale. Needham expects global electric vehicle production to reach 750,000 units by 2013.

Investment Strategy: While exposure to this emerging sector could be recommended for those investors with an appetite for risk, a measured approach is prudent. Thus, our basket of stocks offers diversity in market cap, business segments and risk allocation. To help explain the fundamentals of each stock, we have recruited the analysis of Tim Collins, a financial adviser at TangleTrade and a RealMoney contributor.

Up Next: See what's in the basket.

Polypore International

52-Week Range: $10.17-$29.40

Morningstar Fair Value Estimate: $25

Company Overview: Polypore International ( PPO) membrane separators are a key component in lithium and lead-acid batteries in the energy-storage segment.

Share Catalysts: Strong demand for the Nissan ( NSANY) Leaf, Mitsubishi iMiev, Ford ( F) Transit Connect and CODA automotive vehicles that are using Polypore's material and are scheduled to begin rolling out in late 2010 will be key drivers of the stock, according to Needham & Company.

Analyst Assessment: "Polypore International is interesting due to the high growth potential it adds in the mix," Collins says. "The fact the company supplies battery separators to the iPad is huge and will not only drive revenue for the next two years, but also attract momentum traders. The current market cap is only twice sales, and the company has a forward P/E under 20, which is acceptable given the anticipated high growth rate. Debt is a concern, but with profitability already well in hand, a solid product mix, and consistently strong earnings, this one is a must own."

Sociedad Quimica y Minera

52-Week Range: $30.98-$43.93

Morningstar Fair Value Estimate: $25

Company Overview: Sociedad Quimica y Minera ( SQM) is the world's largest lithium producer.

Analyst Assessment: "I've always been drawn to Sociedad Quimica y Minera for their fertilizer business and international presence, but with the key components to make all this exciting lithium technology, they will be a major player or a takeover candidate for some time to come," says Collins. "This isn't a pure play, but offers nice diversity and even a small dividend. Around a year ago (Sept. 2009), SQM reduced its lithium prices 20% to spur demand and research. If the market demand grows and the sector were to pick up even more momentum, SQM should have the ability to raise current prices 20+% without hesitation. I don't believe that is factored into any of SQM's numbers or any thought folks have given this company."

Johnson Controls

52-Week Range: $23.59-$35.77

Morningstar Fair Value Estimate: $35

Company Overview: Johnson Controls ( JCI) is a diversified company in the building and automotive industries and a leading producer of lithium battery systems.

Share Catalysts: Needham & Company predicts that the rollout of the battery-powered Ford Transit Connect in late 2010 and strong demand for the Mercedes S-Class and BMW Active Hybrid vehicles will most strongly affect shares.

"Johnson Controls is intriguing and offers the diversity of a conglomerate along with a play on any recovery in the auto industry," Collins says. "The current technical setup is bearish, and there is a very apparent head-and-shoulders pattern which could signal a drop well into the teens if triggered. Shares do have support at $26, and as long as this level is held, I would be comfortable having them as part of the 'green group.' JCI is pestered by the fact it trades more like an auto supplier, so this one will never be as sexy as the others on the list. As such, even though I like its size and diversity, I would keep the position here on the smaller side, less than SQM and PPO."

A123 Systems

52-Week Range: $6.32-$28.20

Morningstar Fair Value Estimate: N/A

Company Overview: A123 Systems ( AONE) develops and manufactures advanced technology lithium-ion battery packs.

Share Catalysts: The rollout of the high-profile Fisker Karma plug-in hybrid electric vehicle. Source: Needham & Company

Analyst Assessment: "Even though their financial results have been disappointing, A123 Systems got started with plenty of VC (venture capital) which gives it cash to work with over the next few years," Collins says. "Also, since the VC has fairly big dollars at stake, AONE has partners with a vested interest in their survival. The deals with Navistar ( NAV) and Fisker could be worth up to $200 million, and half the current market cap is equal to cash on the balance sheet. Obviously, this is going to get spent, but it also means an investor is paying less for AONE's business than rival Ener1's ( HEV). and AONE leads in revenue and has stronger partners in my opinion. HEV does have THINK and Volvo as clients, but think can only produce 5 cars per day right now and Volvo won't be doing anything until at least 2011."

Advanced Battery Technologies

52-Week Range: $3.02-$4.80

Company Overview: Advanced Battery Technologies ( ABAT) develops, manufactures and distributes rechargeable polymer lithium-ion batteries.

Analyst Assessment: "If I wanted to invest in and take advantage of this market, I would use a basket of stocks offering diversity in market cap, business segments, and risk allocation," Collins says. "On the aggressive side, I might consider AONE for a small allocation, but would much prefer Advanced Battery Technologies. It stands with a market cap of only $244 million, has no debt, 23% of the company market cap is cash ($0.82 per share), and it is profitable with a forward P/E of around $9. They are small in the electric market, but growing with a focus on bikes, scooters and SUV's. I think a target of $5 per share in the next 6 to 12 months is achievable. I would pair JCI and PPO with ABAT, SQM, and possibly AONE to create a 'Green Group' basket. A bet on one, especially on something like AONE or ABAT is simply that ... a bet."

-- Written by Andrea Tse in New York.

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