How to Profit From Graphene

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The most frequent question we've been getting here at Private Briefing in recent weeks might surprise you.

It isn't about the outlook for stocks.

It has nothing to do with the so-called "Fiscal Cliff" or federal budgetary "sequestration."

And it isn't about gold, oil or the other commodities we're typically queried about.

It's about "graphene."

Dozens of folks have called or written to ask us for insights on graphene-related investments. If you were among them, give yourself a gold star ... it's a terrific question.

It shows that you know how to zero in on great growth opportunities - and that you've been following the topics we write about.

You also have a good sense of timing.

Michael A. Robinson - editor of the Radical Technology Profits advisory service and our resident tech expert - likes to say that we've entered the "Golden Age of Materials Science," a reality that will open up all sorts of profit opportunities for savvy investors.

And one of those opportunities is graphene - a topic we've been writing about here at Money Map Press since 2011.

If the term is new to you, graphene is a radical new material made from a single carbon atom that is expected to have a big impact on our lives. It's not only the thinnest material discovered so far, it's also the strongest.

How strong? Well, The New York Times recently observed that "a sheet of [graphene] stretched over a cup of coffee could support the weight of a truck bearing down on a pencil."

So you can see why folks are so excited about graphene's profit potential.

As its name implies, graphene is related to the graphite used in pencils. But its feather-light weight and steel-like strength are expected to give it tremendous adaptability: Uses in biotech, wireless communications, computers, aerospace and nanotechnology are already being scouted, Michael has written.

Lest you think that we're succumbing to the hype, consider this. It usually takes decades for breakthroughs to be honored with a Nobel Prize. (Just to give you an example you might be aware of ... If you ever saw the flick "A Beautiful Mind," then you know that Prof. John Nash won the 1994 Nobel Prize for Economics for a "Game Theory" hypothesis that he'd developed during his second year at Princeton - 45 years earlier).

But even though graphene was discovered less than a decade ago, the two Russian scientists who are credited with its discovery and development were awarded the Nobel Prize for Physics - in 2010.

So graphene's potential significance has been widely recognized - including, I'm please to say once again, by you folks.

So how do you invest in something that's still so new, that scientists are just beginning to really understand and develop it, and that's obviously just starting to be filtered into the economic system?

Well, one way is to invest in graphite.

Graphene, you see, occurs naturally in graphite.

I'm vastly oversimplifying this, I know, but if you want to if you want to visualize graphene, one writer quite effectively suggested that we think of it as kind of "an atomic-scale chicken wire that's made up of carbon atoms and their bonds." And the "flake" (crystalline) form of graphite consists of many of these graphene sheets stacked up on each other.

Because of the burgeoning interest in graphene, resident-natural-resources expert Peter Krauth has been keeping a watchful eye on Western graphite producers.

Even without the increases sparked by graphene, the emergence of economies in Asia have brought about a global escalation in demand for graphite ... which is kind of a "miracle material" itself.

A soft mineral that's grayish-black in color, graphite has a super-high melting point, is a great electrical conductor and is a highly effective lubricant. This amazing versatility - coupled with the emergence of new-market economies around the world - has caused demand to accelerate by a healthy 5% a year. And Peter, the editor of our natural-resources-focused Real Asset Returns advisory service, says that new uses of graphite will cause demand to accelerate even more.

"Here's the thing, Bill: A high-quality graphite, known as 'large-flake,' is vital in such new-use applications as solar power, fuel cells, electric vehicles and advanced batteries," Peter told me. "Lithium-ion batteries actually use 20 to 30 times more graphite by weight than lithium. So we'll see graphite-demand growth jump to 11% or more a year."

And while China controls nearly three-quarters of the world's graphite supply, the Asian heavyweight isn't a player in that fast-growing, large-flake segment - meaning it has to import a majority of what it needs. The upshot: Select Western graphite producers will reap the benefits of the higher demand and constricted supplies. And those are the companies that we can profit from, Peter said.

Two stocks, in particular, he says are shaping up as "must-own" graphite plays.

The first is GrafTech International Ltd. (NYSE: GTI), a Parma, Ohio, firm with 125 years of experience with carbon- and graphite-related technologies. It's involved in such high-growth businesses as energy storage, semiconductors, fuel cells, lubricants, electronics and aviation.

Best of all: GrafTech is a leading global holder of graphene patents.

GrafTech shares have been downgraded (from "Buy" to "Market Perform" or "Underperform" - but not to "Sell") by a number of analysts during the last month or so. And the target price has been cut from $16 or more to roughly $12 - which is still 25% above where the stock has been trading of late.

But Peter says the downgrades may have been overdone and very much likes the company's long-term potential.

"I actually like GrafTech, despite weakness of late," Peter said. "The stock is trading at a very low P/E of 9. And given that a bottom appears to have formed, the chart looks bullish. Add in the fact that the company has a stake in how steel production goes, and I'm expecting this will be a good year for them."

One caveat: The company is scheduled to report earnings on Feb. 26. With a stock that's facing a bit of near-term uncertainty, our experts are often hesitant to recommend a full-position purchase in advance of an earnings report. And the stock isn't likely to do much until then, either.

But if it's graphene that truly interests you, you're looking at this as a big payoff over a longer stretch.

Obviously, you can buy the stock now, and set a standard 25% "trailing stop."

Or you can consider an alternative that would turn the uncertainty work to your advantage. Instead of buying your full position now, look at a strategy that allows you to "average into" GrafTech's shares. If the price declines, it will let you build a position even as you lower your average purchase price.

To pursue this approach, calculate the size of the position that you'd ultimately like to have, and slice that up into three or four equal-sized, incremental purchases.

If you decide to go with four, set up something like this. Buy the first block now. Buy the second block in three months, or if the stock falls 10%, whichever comes first. Do the same for the third and fourth purchases.

(Establish time and price-decline parameters that fit in with your personal risk and comfort-level parameters. And be consistent with how you establish them and then with how you execute them.)

A second, more-speculative, graphite play is Ottawa-based junior producer Northern Graphite Corp. (PINK: NGPHF or CVE: NGC.V).

"I think the stock could do well from here, but it's worth noting that it's more than doubled from December already," Peter said. "In terms of projects in development, it's probably the most advanced Western pure-graphite-play company around."

Northern Graphite's main asset is the Bissett Creek graphite project located 65 miles east of North Bay, Ontario, and nine miles from the Trans-Canada Highway (Route Transcanadienne).

As the company describes it, Bissett Creek is a large-flake, high-purity, scalable deposit that is situated near major roads, a natural-gas pipeline and other needed infrastructure, meaning it will have competitive operating costs. The latest plans call for the company to complete the environmental and mining-permitting process during the current quarter, to begin mine construction sometime this year, and be in production by late 2014 - as long as financing is available.

With the shares trading at roughly $1.22 (Canadian) each, it goes without saying that this is a highly speculative play. That means the shares are likely to be highly volatile, and could be subject to big downdrafts. Be sure you can stomach the ride.

If you decide to invest, don't chase the stock - and pay no more than $1.28 Canadian (if it runs up past that point, give it a chance to recede). Observe standard position-sizing cautions (and limit your purchase to a maximum of 1% of your investment holdings). If you follow those parameters, you can go as high as 50% on the "trailing stop."

There are obviously some other graphene-related profit plays out there. But these two represent a good start. If there's interest, let us know. As you can see from today's Private Briefing, we value your input - and use it to guide what we deliver to you.

Drop me a line at PrivateBriefing@MoneyMorning.com and let me know. I'm always glad to hear from you folks.

[Editor's Note: Shares of security-software firm CommTouch Inc. (Nasdaq: CTCH) - recommended by Chief Investment Strategist Keith Fitz-Gerald in our brand-new report "The Seven Investments You Have to Make in 2013" - were up another 4.59 % in mid-afternoon trading yesterday and are now up 22% since we recommended them to you back on Feb. 4. If you bought the stock on our recommendation, I sure would like to hear about it from you. Just drop me an e-mail. And we'll see you tomorrow.]

About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish… and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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