PHEV's Get Plugged In

By Aaron Levitt | June 28, 2012 AAA

As the long-term trend in transportation fuel costs continues to rise, many consumers have begun to look towards alternatives as a way to power their vehicles. Likewise, investors have become enamored with firms like natural gas engine maker, Westport Innovations (Nasdaq:WPRT) as a way to play the growth of these unconventional vehicles.

One such alternative, 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.

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Significant Potential
Within the next decade, many analysts see electrified vehicles sharing the roads with more traditional automobiles. 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. Driven by rising fuel costs, government purchase incentives, increasing fuel economy standards and increased vehicle availability, Pike Research anticipates that the annual market for hybrid electric and plug-in electric vehicles will grow to nearly 2.9 million vehicles by 2017. Recent data provided by the U.S. Energy Information Administration is helping support Pike's claims.

Being close to charging infrastructure is critical to PHEV adoption and the U.S. is poised to meet that challenge. A recent report by the EIA shows that the housing stock in the U.S. could support significant numbers of plug-in electric vehicles. Of households that own at least one car, an estimated 49% or 49.6 million housing units, park within 20 feet of an electrical outlet. Most electric vehicles can be charged using the same outlet as a home appliance.

At the same time, a variety of retailers such as mall operator Simon (NYSE:SPG) and Cracker Barrel (Nasdaq:CBRL) have begun installing charging stations for the growing fleet of electric cars, bikes and scooters. This is an important step, as these charging stations will ultimately help calm consumers' range-anxiety fears. According to Pike, by 2015 Americans will have access to nearly 21,500 public charging stations in locations such as retail stores, restaurants and municipal parking lots.

SEE: Are Hybrid Vehicles Worth The Extra Cost?

Playing the Growth
With charging issues and range-anxiety beginning to dwindle, now could be PHEV's time to shine. Already a wide range of automobile manufacturers from Nissan (OTC:NSANY) to Ford (NYSE:F) have released or plan on releasing electric hybrid versions of their popular compact and midsized sedans. However, these models will still only represent a small portion of their overall product mix. For those wanting a pure PHEV player means adding Tesla Motors (Nasdaq:TSLA). The company has made progress getting its factory started in California and increasing production of internally manufactured parts. More importantly, the firm recently delivered its first Model S electric luxury car. Analysts currently have a $38 price target on the growth stock.

The electric and hybrid vehicles movement can be summed-up in one word: batteries. The underlying holdings in the Global X Lithium ETF (ARCA:LIT) focus more on battery production rather than lithium prices. The Fund is a perfect proxy for the advanced battery market and companies like A123 Systems (Nasdaq:AONE). Just as important to advanced batteries as lithium, metals such as neodymium are needed. The Market Vectors Rare Earth Metals ETF (ARCA:REMX) follows a basket of strategic minerals producers like Molycorp (NYSE:MCP), which should benefit from any PHEV growth.

SEE: How Long Until Your Hybrid Pays Off?

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. For investors, now could be the time to bet on the sector's future dominance. The previous picks, along with charger specialist AeroVironment (Nasdaq:AVAV), are great ways to add some exposure to the EV sector.

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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