As the long-term trend towards higher energy and transportation fuel costs continues to rise exponentially, many consumers and businesses have begun to look towards alternatives as a way to power their vehicles. Everything from fuel cells to natural gas is getting the nod.

However, one such growing alternative is a bit more “electric”.

Plug-in hybrid electric vehicles (PHEVs), are poised to gain popularity as a greater focus is placed on energy efficiency, fuel economy and lowering carbon emissions. It's a safe bet that over the long term, consumers will eventually switch out their gasoline-powered cars for rechargeable or hybrid models. The question for investors is how long they will have to wait for their bets to pay off. That answer may come sooner than most think.

Slow, But Ramping Up  

While the shift towards a hybrid and PHEV future has been slow going. Sales of the vehicles have been disappointing as high purchase prices and issues resulting from nature of the vehicles themselves- charging times, range anxiety, and the lack of charging infrastructure. Several factors are now moving towards the sectors favor and the number of PHEV’s on our roadways could surge over the next decade.

According to cleantech think-tank Pike Research, hybrid electric vehicles (HEVs), plug-in hybrid electric vehicles (PHEVs) and battery electric vehicles (BEVs) will all continue to capture a larger portion of the total vehicle market. Pike’s latest bit of research shows that annual worldwide sales of electric vehicles (EVs) will reach 3.8 million by 2020. 

Driven by the popularity of models such as Tesla’s (NASDAQ:TSLA) Model S and Nissan’s (OTCBB:NSANY) Leaf, Pike estimates that sales of plug-in EVs will grow at a compound annual growth rate of nearly 40% for the rest of the decade. That compares to just a CAGR of 2% for the overall automobile market. 

Driving that growth is the availability of charging infrastructure and various consumer incentives.

Pike’s research shows that there are now more than 64,000 electric vehicle charging stations currently operational worldwide. Here in America, that number is still growing. Municipal parking lots, shopping malls and restaurants are adding new charging stations in spades, while a collation of eight states recently unveiled an ambitious project to develop EV fueling infrastructure and incentives for building EV-ready public real estate. 

Getting Charged On PHEV’s

With charging issues and range-anxiety beginning to dwindle, now could be PHEV's time to shine. Perhaps more importantly, aside from Tesla- and its 400% yearly gain- most of the sector is currently trading for peanuts versus their potential. That gives investors plenty of bargains to choose from.

One of the best could be AeroVironment (NASDAQ:AVAV). While best known for its military unmanned drones, the firm is also a leading producer of both fleet and home EV charging equipment. AVAV continues to rack up deals with automakers including Nissan, Ford (NYSE: F) and Fiat (OTCBB:FIATY) as well as municipal contracts. AeroVironment is installing the EV infrastructure for Washington and Oregon along the "West Coast Electric Highway",  which will span from Canada to Mexico. All of this is great news for AVAV’s growth and investors. 

The electric and hybrid vehicles movement can be summed-up in one word- batteries. And both Panasonic (OTCBB:PCRFY) and Johnson Controls (NYSE: JCI) could be two of best players. Panasonic currently is Tesla’s main supplier of hybrid batteries for its popular electric cars. Meanwhile, Johnson Controls continues to expand into the lithium and hybrid battery market with deals. Both could represent two of the real winners long term in the EV race. 

For those investors looking for broader options in the battery world, the Global X Lithium ETF (NYSE:LIT) should be the go to play. The ETF tracks 19 different lithium miners and advanced battery makers. Top holdings include Sociedad Quimica Chile (NYSE:SQM) and Rockwood Holdings (NYSE:ROC). Just as important to advanced batteries as lithium, metals such as neodymium are needed. The Market Vectors Rare Earth Metals ETF (NYSE:REMX) follows a basket of strategic minerals producers. Both have been beaten down pretty badly over the last few years and could be bargains longer term. 

The Bottom Line

As transportation costs continue to rise, electric and hybrid vehicles are once again returning to the spotlight. New reports show that previous hurdles to the industry- such as range phobias and a lack of charging infrastructure- are being conquered and the sector has a rosy future ahead. For investors, now could be the time to bet on the sector's future dominance. The previous picks are a great way to exposure to PHEVs in a portfolio.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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