I’m buying this under-the-radar income stock with explosive growth potential

Our author thinks he’s found a winning lithium stock that’s flying under the radar. It’s a steady income stock that could be set for huge earnings growth.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Electric cars charging in station

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m looking at buying shares in Compass Minerals (NYSE:CMP) for my portfolio. In my view, the company combines the best elements of an income stock with some serious growth potential.

Historically, the company has been a dividend stock that made money by producing salt and specialty fertiliser. Recently, though, the outlook for the business has changed.

Last July, Compass Minerals identified a sustainable source of around 2.4m tons of lithium. The resource is at a site where it already has existing infrastructure.

I think that company has significant prospects for earnings growth. And its steady commodities business sets it apart from other lithium stocks.

Salt and SoP

Compass Minerals currently produces salt and a specialty fertiliser, sulfate of potash (SoP). I think that these operations are fascinating (really!) but I won’t go into the details here.

Suffice to say that a commodities business like this one comes down to the quality of its assets and the cost of its shipping. And Compass Minerals has huge advantages in both.

The company’s Goderich salt mine is one of the largest in the world, which allows for efficient operations. It is also located on a deep water port, which makes transportation costs low.

Compass Minerals also owns a SoP source in the Great Salt Lake. It’s one of only three natural sources in the world and it’s great for producing specialty fertiliser at a low cost.

This resource is what’s catching my eye. But I’m not that interested in its efficient SoP operations – I’m interested in its lithium potential.

Lithium

Compass Minerals plans to produce lithium as a byproduct of its SoP operations. I think this gives an otherwise steady income stock some explosive growth possibilities.

Lithium is important as a battery metal. As the number of electric vehicles increases over the next few years, I expect demand for the metal to increase substantially over the next few years.

According to a report I read, the increase in lithium demand could be around 600% over the next decade. If this happens, Compass Minerals is extremely well positioned to benefit.

Lithium production is expected to come online in 2025. But the organisation already has an agreement with Ford to supply the metal for its car batteries.

The company’s SoP operations mean that it already has infrastructure in place at its site. This means that it will only have to build processing facilities in order to produce lithium. 

This gives Compass Minerals a lower start-up cost than its competitors. And this is important for commodity production.

Investment thesis

There are a few risks to consider with Compass Minerals. The most significant, in my view, the threat of global warming.

Most of the salt the company sells is used for de-icing roads. As such, warmer temperatures might result in lower demand for its core product.

For me, though, that’s the part of the benefit of the company’s lithium exposure. Even if salt volumes do decline, I expect this to be more than offset by revenues from lithium production.

That’s why I think that Compass Minerals has the best qualities of an income stock combined with potential for serious earnings growth. And that’s why I’m looking to buy the stock for my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »