Biden's Inflation Reduction Act: Investing Winners and Losers

Winner: Tesla

• Industry: Auto manufacturers
• Market value: $903.0 billion

One of the most obvious winners of the Inflation Reduction Act is electric vehicle leader Tesla (TSLA, $864.51).

Tesla was an early beneficiary of federal taxpayer subsidies for EV purchases. But unfortunately, the company also became a victim of its own success. By 2018, Tesla had already sold more than 200,000 electric vehicles, which meant that they had exhausted their government allowance… and that buyers were no longer entitled to the $7,500 credit. This put Tesla at a major disadvantage to younger startups or to traditional automakers that had only recently dipped their toes into the EV market, as its products were effectively $7,500 more expensive.

The Inflation Reduction Act lifts the cap, thus making Tesla EVs eligible for the subsidy again.

Subsidies, or the lack thereof, wasn't Tesla's only issue, of course. The company faces an onslaught of new competition in both electric vehicles and in autonomous driving, two areas where Tesla had a major head start. Tesla also has both the blessing and the curse of being run by eccentric billionaire Elon Musk. Musk remains a visionary in the EV space, but his media antics – such as his attempted purchase of social media platform Twitter (TWTR) – have proven to be a distraction.

Still, the return of the subsidy is a big deal, as is the broader focus on clean, renewable energy. This may have been just the shot in the arm that Tesla's shares needed.

One caveat: The rebate only applies to cars priced under $55,000. So, Tesla might need to sell a cheaper model or a slimmed down version of its Model 3 if it is to take full advantage.

Winner: Albemarle

• Industry: Specialty chemicals
• Market value: $27.9 billion

A major investment in renewable energy and in electric vehicles can only mean one thing: a massive increase in demand for energy storage. EVs depend on large battery packs, and storage is a critical part of making solar and wind energy viable replacements for fossil fuels. After all, the sun doesn't shine at night, and the wind doesn't blow all the time.

Demand for battery storage means demand for lithium, and that's good news for major lithium producers like Albemarle (ALB, $237.99).

Founded in 1887, Albemarle is a leading global producer of lithium and bromine. Without the raw materials that ALB produces, there could be no Tesla or any other electric vehicle. But beyond that, there could be no iPhone or battery-powered laptop computer either. Virtually every wireless electronic gadget you own depends on a lithium ion battery. And those batteries depend on the mining and production of high-quality lithium.

Albemarle isn't a glitzy tech stock. It's a gritty materials stock. But it's the gritty materials stock that makes glitzy tech possible.

Demand for lithium was already strong long before the Inflation Reduction Act was dreamed up, and demand would continue to be strong even if the bill somehow died in the House of Representatives. But the potential increase in demand due to the bill's climate provisions will only turbocharge ALB even higher.

Surprising Winner: Energy Transfer

• Industry: Oil & gas midstream
• Market value: $33.4 billion

The Inflation Reduction Act is known mostly for its emphasis on renewable energy. After all, it pledged to reduce greenhouse gasses 40% by 2030. But given that West Virginia Senator Joe Manchin's vote was critical to the bill's passage – and given the importance of traditional fossil fuels to the Mountain State – there were a few sweeteners for energy and energy infrastructure companies.

At the heart of it is a revision of the permitting process for infrastructure, including pipelines, that would force the government to make a decision on whether or not to issue a permit within two years.

Major pipeline projects, including the Dakota Access and the Keystone pipelines, have been political hot potatoes over the past decade. Eliminating some of the uncertainty surrounding new projects – and forcing the government to give a straight answer in a reasonable timeline – is a major plus for pipeline operators and particularly serial growers like Energy Transfer (ET, $10.82).

ET operates over 120,000 miles of pipeline assets, and approximately 30% of all American natural gas flows through Energy Transfer assets.

Natural gas is considered a "bridge" energy source by many, or an interim step in transitioning away from dirty coal into clean renewable energy. But it's a bridge that we may be crossing for decades, and in the meantime, there is money to be made. At current prices, Energy Transfer yields over 8%.

Winner: NextEra Energy

• Industry: Utilities – regulated electric
• Market value: $172.9 billion

The stated aim of the bill, apart from lowering inflation, is to make the U.S. energy grid greener. As such, $113 billion is earmarked to encourage the building of new renewable electricity plants. That should be boon to NextEra Energy (NEE, $87.98) and other utility operators with a major presence in renewable energy. NEE has ambitious plans in place to eliminate its carbon emissions entirely. Already, the company is the world's largest producer of wind and solar energy.

But the benefits to utilities go beyond the incentives to build more capacity. If the bill is successful in advancing the transition to electric vehicles, then demand for electricity will naturally rise as drivers substitute a trip to the gas station with an overnight charge in their garage.

And the same holds true for appliances, hot water heaters and home heating systems. While we will still be using natural gas in existing construction for decades, new construction will depend far more heavily on electricity.

Loser: Apple

• Industry: Consumer electronics
• Market value: $2.66 trillion

Whether or not Apple (AAPL, $165.35) is a winner or loser here will depend on how the company reacts to the tax on stock buybacks. Apple spent over $85 billion on repurchases last year, and in the past decade, that number is close to half a trillion. And this was before the company announced a new $90 billion buyback plan back in April.

Half a trillion dollars is a lot of money, even for a company as large as Apple. And while those buybacks are testament to the company's massive success and almost unbelievable ability to generate mountains of free cash flow, let's face it: This amount of buying pressure from Apple's treasury has clearly had an impact on the share price. This isn't a testable hypothesis, and we have no way to know what AAPL's value would be today in the absence of those repurchases. But it's not a stretch to say that its share price is significantly higher today than it would have been without all of that additional buying.

So, anything that curtails buybacks going forward would be a potential risk for Apple shareholders.

Now, Apple has options here. They can choose to plow some of that buyback money into higher dividends or even into a one-time special dividend. Or, they could further strengthen their already fortress-strong balance sheet by paying down debt.

And it's entirely possible that Apple just continues with its buyback plans and considers the tax a cost of doing business. The 1% levy really isn't going to make or break the company.

So, while Apple is a potential investing loser of the Inflation Reduction Act… it's not likely to lose all that much, and neither are its fellow buy-back hoovering tech competitors, such as Meta Platforms (META) and Alphabet (GOOGL).

Loser: Johnson & Johnson

• Industry: Drug manufacturers – general
• Market value: $449.9 billion

Big Pharma will have to negotiate with Medicare going forward. And since Medicare pricing tends to drive the pricing by private insurance companies as well, the impact on drug costs should be significant. This should be a major win for patients and taxpayers alike.

That said, we have to temper expectations here. The law phases in negotiation in stages, with only 10 drugs subject to negotiation in 2026. And newer drugs would not be eligible for negotiation until at least nine years after their release.

Further complicating this is the fact that we still don't know which drugs will make the first cut.

Still, a precedent is being set. And future acts of Congress will likely accelerate what the Inflation Reduction Act has started.

None of this is particularly good for Big Pharma giants like Johnson & Johnson (JNJ, $171.11). Given the phased nature of the negotiation, there will be no immediate impact on JNJ's profitability. But it's coming, so investors should be prepared.

Loser: Amazon.com

• Industry: Internet retail
• Market value: $1.43 trillion

Amazon.com (AMZN, $140.80) is a wonder of modern capitalism. Amazon essentially created the e-commerce economy from scratch and then followed that up by creating the cloud computing economy from scratch. It's fair to say that AMZN is the most influential company of the past 30 years, and it has done more to revolutionize the way we live than any other company of our lifetimes.

AMZN also happens to be a pioneer in legal tax avoidance. Despite generating $35.1 billion in U.S. profits in 2021, the company enjoyed a federal income tax rate of just 6.1%, according to the Institute on Taxation and Economic Policy.

Now, to be clear, Amazon did nothing "wrong" by avoiding taxes. We all do everything in our power to lower our tax bills, and AMZN simply took advantage of the opportunities presented. It would be doing a disservice to its investors to not take advantage.

Well, that landscape is now changing. Under the Inflation Reduction Act, companies with at least $1 billion in profits would be required to pay a minimum tax rate of 15% on their reported profits.

Amazon will continue to mint money. But going forward, it's going to have to share a bigger chunk of it with Uncle Sam, which means less for those invested in AMZN stock.