One of the best ways to find stocks to buy is by examining the holdings of ETFs and mutual funds. For example, if you’re looking for the favorite battery stocks investors own, you could check out the Global X Lithium & Battery Tech ETF (NYSEARCA:LIT), which tracks the performance of the Solactive Global Lithium Index.
The only problem with this particular ETF and index is that it has a more materials focus, with a weighting of 49.1%. However, names within the top 10 holdings manufacture automotive-related batteries.
Global X published an updated research piece on March 1 focusing on four companies leading the rise of lithium and battery technology. At least two of these names are worth considering as potential investors.
“The ongoing paradigm shift in the mobility segment toward electric vehicles (EVs) created a need to build out the entire value chain,” Global X contributor Madeline Ruid wrote. …While many investors are familiar with dedicated electric automakers such as Tesla and Rivian, there’s an entire ecosystem of companies further up the value chain making the EV revolution possible.”
With that in mind, here are my three favorite battery stocks for future gains.
BYD (BYDDY)
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Like most manufacturers of electric vehicles (EVs), BYD’s (OTCMKTS:BYDDY) stock has underperformed over the past year, a little more than 7%, compared to 30% for the S&P 500. However, its vertical integration sets it apart from many EV makers.
Ruid wrote, “Outside of internal usage, BYD also sells its batteries under its Blade series to automakers such as FAW, Toyota, Volvo, and Ford.”
“As an iron-based phosphate (LFP) specialist, BYD devotes close to 100% of its capacity toward this chemistry.8 LFP batteries have become an important portion of the lithium-ion chemistry mix because of their relatively low cost and long lifespans compared to higher energy density architectures.”
You can invest in solid-state lithium battery developers such as Quantumscape (NYSE:QS), which is losing hundreds of millions each year, or you can buy BYDDY and own a piece of a company that’s expected to generate as much as $4.32 billion in profit for 2023.
And let’s not forget that Warren Buffett still owns 8% of the company, despite selling off shares throughout 2023. The choice of this battery stock should be evident to the average investor.
Sensata Technologies (ST)
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Sensata Technologies (NYSE:ST) is a business I’m unfamiliar with.
Its products include sensors and other mission-critical products for end users. One related to lithium-ion batteries is its Lithium Balance battery management systems (BMS). Acting as the brains, the BMS continuously monitors the lithium-ion battery pack to maximize the battery life while ensuring shortened charging times and longer range.
I’m not a tech genius, but a product that makes an EV manufacturer look good while keeping drivers safe would be a winning combination.
However, its shares are down nearly 4% year-to-date and 23% over the past year. It doesn’t help that analysts are on the fence about it. Of the 17 that cover it, only seven rate it a buy, with a $45.25 target price, 26% higher than where it’s currently trading.
Interestingly, the analyst EPS estimates for 2024 through 2026 are $3.76, $4.28, and $4.80, respectively. That’s 9.5x for 2024 and lower, moving ahead to 2025 and 2026.
As CEO Jeff Cote said in the company’s Q4 2023 press release, Sensata continues to grow its electrification revenue. In 2023, it was $700 million (17.3% overall), up 50% from a year ago. Since 2021, it’s generated more than $1.3 billion in future revenue opportunities in electrification, suggesting that the best is yet to come.
TDK Corp. (TTDKY)
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TDK Corp. (OTCMKTS:TTDKY) is a Japanese-based manufacturer of electronic components for magnetic technology.
For all you nostalgic old fogies (I’m one of them) out there, who can forget TDK audio cassette tapes? First produced in 1966, they took that technology in the 1970s and extended it into video cassette tapes. In 1979, it got into portable cassette tape players.
Today, TDK makes many different products, including solid-state and lithium-ion batteries.
The company’s ATL division is the world’s largest manufacturer of lithium-ion batteries for electronic devices. ATL operates a joint venture with CATL (Contemporary Amperex Technology Co. Ltd.) called Ampace, which focuses on advanced lithium-ion batteries for short-distance travel applications such as e-motorcycles, ATVs, scooters, etc.
Through the first nine months of FY 2024, TDK’s revenue was 1.62 trillion Japanese yen ($10.86 billion), marking a 5.3% decline from a year earlier. On the bottom line, the company’s operating profit was 155.75 billion Japanese yen ($1.04 billion), 17.5% lower than in 2023.
Despite declining revenue and operating profits due to lower working capital, it increased cash flow by 45% to 333.34 billion Japanese yen ($2.23 billion). As a result, it added 120.27 billion Japanese yen ($810 million) in cash in the first nine months of FY 2024.
Based on a trailing 12-month free cash flow of 199.90 billion Japanese yen ($1.34 billion) and an enterprise value of $19.66 billion, its free cash flow yield is 6.8%. Anything between 4% and 8% is considered fair value.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
