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4 Cheap Stocks of Companies Working on the Energy Transition

Why these narrow-moat stocks are worth a look.

Securities In This Article
Arcadium Lithium PLC
Albemarle Corp
STMicroelectronics NV
Infineon Technologies AG

The carbon transition is emerging as a powerful investment theme, reflecting the shift from an economy that’s heavily dependent on fossil fuels to a sustainable one. That conversion will affect all companies and issuers.

Big drivers include increased regulatory disclosures, as well as legislative incentives like the Inflation Reduction Act of 2022, the Infrastructure and Investment Jobs Act, and the Chips and Science Act, all of which are generating enormous momentum for America’s domestic clean energy industry. “The IRA has been absolutely huge for the U.S.,” says John McDonagh, who covers clean tech for PitchBook, a Morningstar company. In response, Europe has also moved to expand the European Green Deal and its Net Zero Industry Act.

For example, the IRA provides various tax credits for electric vehicle purchases and incentives for charging infrastructure and manufacturing. Operating costs for EVs are 45% lower than for internal combustion vehicles, NXG Investment Management Co-Chief Investment Officer Saket Kumar said at the recent Morningstar Investment Conference. That has led U.S. adoption “to a tipping point.”

Indeed, Ian Simm, CEO of Impax Asset Management, believes the carbon transition will help accelerate the world’s growth at a time that goods, services, and money are all becoming more expensive. “This is one of the most exciting times to be investing in transition,” he says.

How to Invest in the Energy Transition

One place to start is the Morningstar Global Energy Transition Index, which targets the stocks of 41 companies that Morningstar analysts deem to be well positioned to benefit from themes like carbon capture, energy storage, hydrogen, and renewable energy. Over the past year through May 17, the index is up 5%, versus a 2.9% gain for the Morningstar US Market Index.

We screened the index for holdings with competitive advantages, meaning they have an economic moat. (The screen excluded companies with no moats, such as solar companies.) Then, we sorted the companies by cheapness, as expressed by discount to fair value. Four were 25% cheaper than the Morningstar analyst’s fair value estimate, including lithium plays Albemarle ALB and Livent LTHM, and chip stocks STMicroelectronics STM, and Infineon Technologies IFX.

A table of tickers, price/fair value, Morningstar Rating, industry, and index weighting for Albemarle, Livent, STMicroelectronics, and Infineon Technologies.

These Lithium and Semiconductor Stocks Will Benefit From the Carbon Transition


Fair Value Estimate: $350

Morningstar Rating: 5 Stars

Morningstar Uncertainty Rating: High

Morningstar Economic Moat Rating: Narrow

Albemarle is one of the world’s largest lithium producers, with assets in Chile, the United States, and Australia. In particular, its Chilean operation is among the world’s lowest-cost sources of lithium, a key component of electric vehicle batteries. “As electric vehicle adoption increases, we expect high-double-digit annual growth in global lithium demand. In response, Albemarle plans to expand its annual lithium production capacity from 200,000 metric tons in 2022 to 500,000-600,000 metric tons by 2030,” writes Morningstar strategist Seth Goldstein.

Over the long term, Goldstein expects lithium “prices will remain well above our long-term forecast for lithium carbonate at $12,000 per metric ton through the rest of the decade. Based on our price elasticity analysis, we forecast spot prices will average in the mid-$50,000 range in 2024 and average a little under $40,000 per metric ton during this decade. We expect high-quality lithium hydroxide used in long-range batteries will continue to sell at a premium to carbonate, reflecting higher conversion costs.”


Fair Value Estimate: $42

Morningstar Rating: 4 Stars

Morningstar Uncertainty Rating: Very High

Morningstar Economic Moat Rating: Narrow

Livent is another pure-play lithium producer, spun out of FMC in late 2018. Livent’s merger with another pure-play lithium producer, Allkem, is expected to close at the end of the year. That merger should give Livent “a top-four lithium production capacity globally,” Goldstein writes.

Recently, Livent exceeded first-quarter earnings expectations and increased guidance for the full year. “The company’s lithium carbonate production in Argentina is among the world’s lowest-cost lithium sources,” writes Goldstein. “As electric vehicle adoption increases, we expect high-double-digit annual growth for global lithium demand. Livent is looking to expand its Argentine brine-based lithium production capacity from 20,000 metric tons in 2022 to 100,000 metric tons on a lithium carbonate equivalent basis by 2030.”


Fair Value Estimate: $59

Morningstar Rating: 4 Stars

Morningstar Uncertainty Rating: High

Morningstar Economic Moat Rating: Narrow

STMicroelectronics is a leader in silicon carbide-based power chips, which are more resistant to heat and pressure than conventional semiconductors and allow EVs to extend their driving range. “We’re particularly encouraged by ST’s prospects in silicon carbide-based semiconductors, as the firm boosted its forecast to $1.2 billion of revenue from this product line from $1.0 billion on the back of robust demand for silicon carbide power semis in electric vehicles,” writes Brian Colello, sector director at Morningstar. In 2019, silicon carbide accounted for just $200 million of sales, but Colello expects that to grow to $2 billion in 2025.

Adds Colello: “We expect the SiC market to rise exponentially in the next decade or more, given the potential for SiC semis to displace silicon-based semis in electric vehicles and industrial applications as SiC can handle higher voltages and temperatures. We believe the firm is relatively higher up the learning curve than many (but not all) of its SiC peers, and the company has a marquee design win today, selling SiC products into inverters inside of Tesla’s Model 3 EVs.”

Infineon Technologies

Fair Value Estimate: $52

Morningstar Rating: 4 Stars

Morningstar Uncertainty Rating: High

Morningstar Economic Moat Rating: Narrow

Infineon, a leading European chipmaker, recently lifted expectations for earnings for the full fiscal year. “Infineon should emerge as a leading supplier for electric vehicles and active safety systems used in cars, with increasing exposure to car ‘infotainment’ systems,” Colello writes. Infineon also makes silicon carbide power chips. “The company’s exposure to power semis allows it to benefit from trends in the electronics industry toward power conservation, not only in more efficient devices like industrial drives but also in green energy solutions like solar panels.” To be sure, Infineon faces lots of competition, says Colello, but it also focuses on power products “that are valuable to customers.” That should help it enjoy stronger pricing power and higher returns.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Leslie P. Norton

Editorial Director
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Leslie Norton is editorial director for sustainability at Morningstar.

Norton joined Morningstar in 2021 after a long career at Barron's Magazine and, where she managed the magazine's well-known Q&A feature and launched its sustainable investing coverage. Before that, she was Barron's Asia editor and mutual funds editor. While at Barron's, she won a SABEW "Best in Business" award for a series of stories investigating fraudulent Chinese equities, which protected the savings of investors and pensioners by warning about deceptive stocks before they crashed.

She holds a bachelor's degree from Yale College, where she majored in English, and a master's degree in journalism from Columbia University.

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