This article was originally published on March 30, but we continue to get questions and are re-posting it here to supply some answers — the stocks teased are all down quite sharply since we first published, with drops ranging from 6% for the biggest of them (Freeport-McMoran (FCX), the “free” idea he shared) to a loss of 24% for one of the smaller battery ideas (Novonix (NVX)).

Here’s the lead-in to the latest teaser ad from Fry’s Investment Report ($49/yr)…

“From ‘America’s Top Trader’ – Brace Yourself For… ‘The Revenge of the Heartland’

“America’s surprising new “Epicenter of Wealth” could create a whole new class of American millionaires… even as millions more face shock and ruin..”

And alternate versions of the ad feature this intro:

“An Urgent Report From “America’s Top Trader”

“Ford is in for over $11.4 billion… Toyota, $3.8 billion… BMW, $1.7 billion… Hyundai, $5.5 billion… Mercedes, Volkswagen, Nissan…

“America’s New EV ‘Supercluster'”

This ad started circulating in February, actually… but the prices of pretty much every stock he teases were falling through March, and have fallen further still now, so maybe being late is good for us this time around.

What follows was last udpated on March 30, 2023.

And we can summarize the next half-hour of blather from him like so: Riches come from the “cluster effect,” when an industry grows up in a particular area, creates an ecosystem to support it, and builds something fantastic over a long time. His past examples are the automakers in Detroit, the chipmakers and later the tech companies in Silicon Valley, the financial firms around Wall Street in New York, oil in Houston, biotech in Boston, you get the idea.

And Eric Fry filmed his video “presentation” from the top of Lookout Mountain, which is in the northwest corner of Georgia and looks down on Chattanooga, Tennessee, which is where he sees this next “cluster” growing, all focused on building electric vehicles. Here’s a bit from the ad:

“… spread out on this horizon, you’re looking at America’s new technological heartland. And I’m not talking about Silicon Valley.

“Instead, I’m talking about the seven U.S. states you can see from this mountain…

“Tennessee… Kentucky… Virginia… Georgia… Alabama… and both Carolinas…

“Because in each of these states – especially in Kentucky and Tennessee – there’s a new economic ‘supercluster’ of innovation and investment taking shape .

“In fact, in the 300 square miles surrounding this mountain…

“You’ll find no fewer than 28 different companies, each dedicated to building out the future for electric vehicles and the batteries that power them.

“Collectively, they’re investing billions of dollars in kickstarting a new era of American ingenuity and prosperity – something I call ‘Made in America, 2.0.'”

I expect this is mostly driven by the fact that the automakers drifted into the Southeastern US over the past several decades already, fleeing the power of their unions in the midwest and looking for cheaper labor and lower taxes, so it’s no surprise that a lot of the big new EV-focused investments by Ford and GM and others are being made in Tennesee and Georgia and Alabama… and where the automakers go, their suppliers follow.

So Fry’s pitch seems to be that we’ll see a new super-cluster of EV-related companies springing up around the Southeast, reinforcing the growth of that sector, and that we’ll also see the push for more “made in America” supplies and components and raw materials to support this growth, which will create some stock market winners, from battery makers to miners to technology suppliers.

The first stock he pitches is a freebie, that’s Freeport-McMoran (FCX), and that’s basically just a “we’re going to have a copper shortage” pitch — Freeport is one of the world’s largest copper (and gold) miners, and they’ll be a beneficiary as electrification creates more and more demand for copper. Pretty reasonable, and copper is indeed in a precarious supply situation if the demand grows as many folks expect, though it’s not going up in price right at the moment. FCX shares do generally trade in line with copper prices, with some leverage, so like many miners they rise rapidly when copper prices are going up, and fall rapidly when copper prices are falling. Usually. Here’s what that looks like in chart form — that’s FCX in purple, and the monthly copper price in orange, over the past 25 years or so:

Not cheap, but pretty reasonably valued, as long as they don’t have a major problem with a big mine. The other big copper play that has come up in teaser ads somewhat recently is Southern Copper (SCCO), if you want to check out alternatives… similarly valued, but more volatile, and pays a much higher dividend.

And how about the secret stocks Fry teases? He hints at five, so let’s put the Thinkolator to work…

“This first company uses AI to run “smart” EV-charging grids.

“With multiple energy sources hitting power grids these days…

“And with all that power getting stored until it’s needed…

“You need software that’s smart enough to manage that energy flow.

“This company has an AI-powered system that does exactly that.

“It’s already built the largest smart energy storage network in the world.

“It’s also already partnered with Fortune 500 companies across the US.

“And it’s machine-learning technology is tailor-made for streamlining operations for the vast EV-charging networks already being built across the US.

“Demand for this company’s product is booming, with an order backlog that’s already doubled year-over-year.

“This is the first pure smart-energy-network play to go public in the US.

“And you can still get shares for under $10.”

That’s very likely to be Stem (STEM), which has been pitched by many newsletters over the last year or so, since they went public through a SPAC merger. I dabbled a little in both STEM and it’s more grown-up competitor Fluence (FLNC) last year, though so far FLNC has far outclassed STEM… mostly because it seems to have gotten ahead of the curve in controlling its supply chain and making sure they can meet customer demand, which has been more of a challenge for STEM. They just announced a new capital raise yesterday, so the stock took quite a hit from that (they’re offering 2030 Convertible Senior Notes, so any dilution will be well off in the future, but still, people don’t seem to like it when their speculative growth companies need money… don’t know what the cost of those Notes will be).

No real direct connection to the buildout of EV production capacity in the Southeast, of course, but they are indirectly driven by the same things — their business is based on having access to relatively inexpensive batteries that they can package and sell to customers, and their future profit hopes stem from keeping those customers as long-term subscribers to their battery management software that helps balance charging and use cycles with the grid and with alternate energy inputs (like solar panels), reducing costs by storing cheap energy and giving power back to the grid when it’s more valuable. I’m still a lot more comfortable with Fluence than I am with Stem, which disappointed investors last quarter with weak results and pretty tepid guidance, but I continue to own a tiny bit of both.

What’s next?

“The second company I want to show you makes synthetic graphite…

“You can’t make lithium batteries without graphite. And this company cuts battery costs by making that graphite synthetically instead of mining it.

“As I’m sure you know, cutting battery costs is a huge EV priority.

“Already, this second company has partnered with Honda, Panasonic, Samsung, and Bosch, just to name a few.

“And it’s just won a huge $150 million grant from the U.S. government to build a brand-new plant right here in Chattanooga.”

That’s Novonix (NVX), which has been listed in the US for about a year but, before that, was heavily teased by a few newsletters for their connections to Tesla and next-gen battery technologies. Ray Blanco, in particular, claimed with great certainty that Elon Musk would be mentioning Novonix by name at Tesla’s big “battery day” a couple years ago, and that never happened… but it is still chugging along with its business of building up synthetic graphite capacity for battery anodes. And the hype cycle has now left them behind, here’s the chart of Novonix shares starting during the hype buildup in 2020 (that first spike on the left of the chart is Blanco’s hype for Tesla’s September 2020 “battery day” event, which washed away almost instantly when it turned out that Novonix had nothing to do with that event, then he and others promoted it into oblivion over the next 18 months as it moved to get a US listing):

It’s pretty wild, a 1,000% gain and then a 90% loss, but that’s also a pretty familiar-looking chart, that’s what hype cycles and bubbles often look like.

So now, we get to start fresh… is Novonix worth a gander? Here’s what I said about them a couple years ago, when Michael Robinson was pitching the stock:

“… they’re all about building up their synthetic graphite anode business, and presumably using their base of battery testing customers to try to make sales connection for these new anodes… and also continuing to develop new battery materials and technologies, largely through their research sponsorship of the Dalhousie University battery lab that originally created Novonix (Novonix was spun out of a research project at Dalhousie in 2013). That lab has been working with both Tesla and Novonix on new battery materials under Dr. Jeff Dahn, who also, a couple weeks before that contract was renewed for five years, signed on to be Chief Scientific Advisor at Novonix (he’s also still working with Tesla, which is the connection Ray Blanco was trying to turn into a commercialization deal and a Tesla endorsement of Novonix last year).

“That next-generation work at the Dalhousie University lab is not what is likely to move the revenue needle anytime soon, but there’s plenty of hope that they might eventually turn their patents in new anode technologies or other battery materials into a real business in Nova Scotia. The larger scale for now, and the real potential for revenue in the next few years, is in Tennessee, where Novonix has the PUREgraphite anode plant in Chattanooga that’s “ramping up” to supply 2,000 tons/year of synthetic graphite for battery anodes.

“That’s mostly going to Samsung at first, they’ve got the initial order for 500 tons, but Novonix also has a non-binding agreement with Sanyo/Panasonic to evaluate the production for possible use. There are a wide variety of price quotes for synthetic graphite, and nobody’s talking about what Samsung will pay, but if we assume a pretty high-end price of $20,000/ton (I don’t know if that’s rational or not, I’ve just seen the number used), perhaps that could bring in as much as $10 million from the Samsung deal and $40 million in annual revenue when the plant reaches capacity. That would still be very small, and an inconsequential part of the global graphite anode business (which consumes roughly 400,000 tons/year)… but Novonix is currently almost entirely an R&D operation, with just a couple million dollars in revenue from their battery testing business, so that would still be a big deal. I should note that they’re also at a US$800 million market cap in anticipation of the value of this pilot project and their future possibilities beyond that in other battery materials and designs, so it’s a small company but not really an unknown microcap — even a huge success from this initial plant would mean they’re already trading at an optimistic and future-focused valuation.”

The shares were around $2 at that point, where today we’re pretty close to a 52-week low at about 75 cents, and the market cap is down to $375 million. They still have about $100 million in cash left from the fundraising they did in 2021, and they got a $150 million grant from the Department of Energy for building out their synthetic graphite production, with a goal of building that production to 30,000 tonnes. They are just beginning site selection for that, so that’s extremely early days.

And their actual pilot plant that’s producing some synthetic graphite anodes in Chattanooga? Well, the key partner there is now KorePower, which will be buying most of the production for their Arizona battery plant starting in 2024, and ramping up over the next few years after that. Revenue doesn’t really reflect any meaningful anode sales yet at this point, the roughly $8-10 million in annual revenue they’re generating these days is mostly from testing and R&D work, and is supremely unprofitable. The earliest that production could really ramp up and provide meaningful revenue for Novonix is probably 2024.

Next?

“Speaking of graphite…

“You also need to compress and coat it so it can be packed into the anode post of EV batteries.

“This company will do exactly that when its new plant in Louisiana goes into production later this year.

“It’s the first plant of its kind outside of China and the only one in the U.S.

“What’s more, the company’s initial graphite output is nearly sold out already…

“Thanks to a four-year purchase contract with a major U.S. EV manufacturer.”

That’s Syrah Resources (SYR.AX, SYAAF), which produces natural graphite at a mine in Mozambique and aims to process that flake graphite into high-end anodes for EV batteries at a plant they’re building in Vidalia, which is supposed to begin production of about 11ktpa later in 2023 (ktpa is thousand tonnes per year). The Mozambique mine, Balama, is sustainable and large but not super-profitable at the moment, with cash costs pretty close to their average sales prices last quarter, though they do say that production and margins should improve… but the real profit would come from vertical integration, they hope, once the Vidalia plant is operational and they can sell.

Tesla has an offtake agreement to buy about 70% of Vidalia’s production, at an undisclosed fixed price, and to buy in for more than half of the expanded production when they quadruple the Vidalia operation in a few years (or plan to, at least — Tesla is the key customer, taking a total of 25ktpa of the planned 45ktpa of graphite anode). We don’t know what the economics of that plant will look like as it gets going this year, but it should at least show a more meaningful revenue line. They’re under construction right now, with production expected to start in the third quarter, though they won’t really be producing at their full run-rate of 11ktpa until probably sometime in mid-2025. Ford and LG are also evaluating the product, and considering offtake agreements. Syrah is taking advantage of DOE grand and loan funding to help with the project, one of many “bring battery material production back to the US” investments made by the government, and they say the current construction work is fully funded, but for the next couple years the money might be a little tight, so it will probably be important that Balama keeps up production and generates some profit.

Next?

“Of course, you also need lithium to make batteries…

“But so far, here in the US, that’s easier said than done.

“Because right now, 80% of the lithium worldwide comes from China.

“However, this fourth company I want to reveal to you is building a world-class lithium facility that could change all that.

“And it’s building that factory 55 miles from Chattanooga.

“When it’s finished, this single plant is expected to double U.S.-based lithium production.”

I guess we can see why Fry was in Chattanooga, lots of focus on that part of Tennesee … and yes, this is a hint about the Tennessee Lithium project, which is a processing plant for lithium that Piedmont Lithium (PLL) is planning to build in Etowah, TN, which, yes, is about 55 miles northeast of Chattanooga.

Piedmont was one of those penny stock stories that keeps the hope alive, it went from being a $50 million Australian penny stock a few years ago to getting a Tesla offtake deal for a potential lithium mine in North Carolina and spiking up in price, then, perhaps partly because of local opposition to permitting that project, moved on to invest in a spodumene project in Ghana to secure raw materials, and planned this Tennessee Lithium facility to process the spodumene into lithium for batteries. That, plus a joint venture with Sayona’s North American Lithium project in Quebec, which is expected to restart production this year and supply some spodumene, gave Piedmont investors hope and drove the company up to a billion-dollar valuation, where it still stands now (they also own 25% of Sayona, which at current prices would be worth about $300 million).

You can get a picture of the company’s plans from their recent Investor Presentation, but with the exception of the Quebec joint venture, which if it begins production is pretty much earmarked to be passed right through to Tesla and LG to satisfy offtake agreements over the next few years (LG Chem also bought a million new Piedmont shares as part of their latest offtake deal), this is really early-stage stuff — they are just in the early engineering planning at Tennessee Lithium, which could be operating in 2025 or 2026 at the earliest; Atlantic Lithium’s Ghana project, which is what they hope will supply the Tennessee plant, is not yet under construction and is hoping to be mining in 2025; and the Carolina project may be stuck in permitting and doesn’t seem to be a major focus right now (they say that if the permits come through, and presuming that financing is available, they could begin production in 2027).

They’re also the focus of a bear attack at the moment, Blue Orca published a critical short report a few weeks ago, alleging that the Ghana project won its permit through corruption and won’t supply the spodumene the Tennessee plant will need, with the corruption possibly bouncing back on Piedmont and hurting its US government grants. No idea how much of that is a real risk and how much is short-seller exaggeration, the cynic in me will note that corruption is rampant in mining projects in many parts of the world, and we shouldn’t be at all surprised if they had to bribe a general’s son to get their permit in Ghana (or if, now that the General is out of power, they have to bribe someone from a different party)… but even if everything is kosher in Ghana, there’s a lot of “going to be built over the next couple years” uncertainty in everything at Piedmont Lithium, and the hope and expectation seems to be, at least at this valuation, that they’ll become a vertically integrated US lithium producer on a pretty meaningful scale within a few years, so any additional risk is reason to be a little wary. Here’s a little excerpt from Blue Orca’s short report, which at least provides a more bearish perspective to balance out the company’s optimism:

“We are short Piedmont because without Atlantic’s Ghana supply, Piedmont and any promise of near-term revenue from its much-hyped
Tennessee facility are dead on arrival. Without Ghana, industry experts and even a former Piedmont senior executive have confirmed that
Piedmont is unlikely to find a source of replacement spodumene. Additionally, FOIA requests we obtained from the Department of
Energy (“DOE”) suggest that the spodumene from Ghana was important to Piedmont’s grant proposal, meaning that the loss of the offtake
agreement, and questions surrounding Piedmont’s own potential liability under the FCPA and other anti-corruption statutes, raise doubt
about whether Piedmont will ultimately receive the conditional government funding.

“Ultimately, the premise of Piedmont’s valuation is the Company’s claim that it will soon leverage spodumene from Ghana to become a
fully integrated lithium hydroxide producer. We think not.”

Piedmont disputes that, of course, and says that they’d be able to find alternate spodumene supplies if the Ghana project isn’t producing in a couple years. The one or two analysts who provide estimates say to expect Piedmont to be profitable this year, earning about 50 cents per share, presumably because they’ll sell a little bit of spodumene from Canada (ramping revenue to $166 million, from a starting point of zero), and to grow rapidly to $14 in earnings per share in 2024 and $31 in 2025, so from that perspective it looks downright cheap at $57. They do have about $100 million in cash still, and they spent about $60 million last year (roughly half on overhead and operating costs, half on capex and investing in affiliates, including the Ghana project), so they don’t have to raise money right now… but they probably will before too long, if they want to keep the Tennessee Lithium development moving forward, depending on how much government largesse comes their way (and when).

It’s a good big-picture story, North American lithium and domestic lithium processing, which is what the government and their customers want… but it’s going to take a while, and sounds to me like there’s some reason to be wary about costs and timelines, even if you’re not particularly concerned about the Ghana corruption stuff.

That’s not just these three materials companies who are going to struggle with timelines and construction and financing, of course, these kinds of industrial projects always take a lot of time — building a mine comes with extra struggles, too, since permitting can often take years (and might fail), but even the processing plants take years to design and build, whether your a multibillion-dollar behemoth or a little startup. And though we all know that demand for almost all of these raw materials is climbing right now, largely because of electric vehicles, we also know that lots of companies are trying to meet that rising demand, and it’s still a commodity business — nobody really knows what the price of lithium or graphite anodes or whatever else will be in 2025 or 2026 or 2030.

Next?

“Finally, the last company I want to show you specializes in microsensors…

“Why microsensors? Here’s why…

“EV batteries need all kinds of monitoring to keep your vehicle running smoothly.

“This company specializes in a fiber-optic technology, that’s ideal for the job.

“It also makes 5G network solutions that help make autonomous driving possible.

“This company is already an industry leader and has an impressive list of partners…

“Including not just car companies but NASA, ConocoPhilips, and Lockheed-Martin.

That’s not enough clues for any real certainty here, but the Thinkolator’s best answer was Luna Innovations (LUNA), so we’ll toss that on the pile as our guess. Luna is actually an interesting little story in the fiber-optic space… this used to be a strange little R&D shop, with its curious fingers in lots of unprofitable pies, and it has been promoted by newsletters before (including way back in 2008, when they were expected to cure baldness. Seriously).

Now, thankfully, they’ve spent a few years reorganizing and strategically restructuring, have jettisoned some of their R&D projects and acquired a few more companies in the fiber-optic sensing and testing space, and they’re beginning to build something meaningful in that little segment of the market. They’re still small, and compete with some giants in this space (including Keysight (KEYS), which I own, and National Instruments (NATI)), but they have at least a coherent package of products and services now, and it is growing, both organically and through acquisitions. They provide fiber optic sensors and testing equipment, and according to their latest investor presentation they’re expecting to grow sales at about 15% and adjusted EBITDA at 15-30% this year, which is pretty solid (earnings are way less steady, partly because of some big line items for “discontinued operations” following their restructuring), and the current valuation, with a market cap of about $215 million, is about 15X that 2023 adjusted EBITDA number.

There’s clearly some risk here, while they’re forecasting that earnings will really grow and stabilize and haven’t really become very consistent with their cash flow and earnings just yet, but I do have a soft spot for aspirational little industrial conglomerates, companies with a few specialized products who are acquiring small bolt-on companies and growing their platform, especially if they can show that they’re consistently generating positive cash flow. Their last quarter, announced in mid-March, was clearly a bit of a disappointment (the stock fell from about $9 to $6), but volatility is also part of the price of admission for these tiny stocks (LUNA was at about $4 six months ago, for example).

Luna is not especially focused on the automotive sector, though they do highlight some EV applications for fiber optic sensing — I’d guess that their defense and aerospace work with similar kinds of sensors is a larger business, as is their communications testing business (which is the fastest-growing segment at the moment), and many of the named projects they mention are infrastructure-related (sensors for dikes, for example, or pipelines), but they do keep signing new customers, including some pretty large OEM deals (they’ve mentioned OEM deals with Northrop Grumman, Lockheed and Intuitive Surgical recently). I expect I’ll come back to this one, I like the trajectory the business is on but I need to dig into this restructuring they’ve been doing for the past five years before I get too excited. There is one analyst providing estimates for LUNA, he says to look for 30 cents in earnings per share this year and 40 cents next year… if that’s reasonable, then the current $6.50 share price is perhaps a “full” valuation at ~20X earnings, but it’s not ridiculous.

So there you have it, dear friends — five potential beneficiaries of the big “cluster” of EV and battery development in the Southeastern US, and of the “reshoring” of battery materials in general… three of them certain matches for Eric Fry’s pitch, and two a bit more “guessy”. Any of them sound like profitable ventures to you? Have other favorites that follow similar stories? Let us know with a comment below.