One of the best-performing industries this year has been electric vehicles (EV). Everyone is aware of Telsa’s (TSLA) impressive performance, up 642% YTD. The company has become the seventh-most valuable company listed on a US exchange and was also recently inaugurated into the S&P 500 index, which means that it will be the recipient of institutional flows.
However, beyond Tesla, there are many EV stocks with impressive gains. YTD, the Krane Shares Electric Vehicle and Mobility ETF (KARS) is up 62%, while the S&P 500 has a YTD gain of 14.6%. For most of the year, the industry consistently displayed relative strength by steadily making higher highs and higher lows. However, in recent weeks, the sector’s advance has paused while the major averages have continued higher.
Some see this pause as an opportunity to get long stocks in the sector before a year-end rally. Those with a more bearish view of the sector believe that the risk factors outweigh positive seasonals.
The EV stocks’ massive gains YTD make them vulnerable to profit-taking. Many of the companies in the sector have achieved lofty valuations that make generous assumptions about future growth yet are years away from reaching full-scale production.
Another consequence of high valuations is the increasing amounts of froth in the sector. The biggest example is the plethora of EV companies that have gone public through reverse mergers with SPACs. Many market participants say the only parallel is the dot-com bubble in 2000 which ended in tears for those that held on too long.
3 EV Stocks to Consider
So, risk-management is paramount. However, until there’s a meaningful reversal, the sector is likely to keep moving higher in the near-term. Its recent consolidation is constructive. We are entering a seasonally bullish period of the year with lower trading volumes. Many of the EV stocks had extraordinary moves around Thanksgiving as low volumes led to exaggerated gains. This could repeat around Christmas and New Year’s.
Another way to manage risk is to focus on companies with products on the market gaining traction with the ability to scale production rather than companies in product development mode. Two stocks with these characteristics are NIO (NIO) and Plug Power (PLUG).
I believe another interesting opportunity is Ford (F) which is making a big bet on an electric Mustang and electric F150 truck that are drawing rave reviews from critics. developing electric cars and pickup trucks that could outcompete many of the EV startups.
NIO is often called the “Tesla of China”. That’s because both companies share certain characteristics.
NIO is following a similar strategy to TSLA in terms of launching high-end, luxury cars, and then creating more affordable models. It’s also been similarly successful in generating loyalty among its customers.
In September of this year, 131,000 EVs were sold in China, of which NIO had a 12% market share. NIO’s next major challenge is scaling production to meet the demand for its product. Bulls are betting the company will eventually be successful in doing so and drive down costs through increased efficiencies.
NIO’s daily chart shows that the stock has formed a double bottom around $40. Traders should remain bullish on the stock above these lows. A year-end rally amid a low volume environment dominated by retail traders favors the stock challenging its November highs.
Plug Power (PLUG)
PLUG is breaking out to new highs. The company has considerable upside potential if it can execute on its ambitious vision.
First, the company built a forklift business based on its hydrogen fuel cells that have won significant market share and won many customers like Amazon (AMZN), Walmart (WMT), and Home Depot (HD). Now, it’s looking to expand into new areas like commercial transportation, passenger transportation, backup power generation, and powering data centers. If it can successfully do so, then it’s likely to validate its $13 billion market cap.
The falling cost of wind and solar energy means the cost of producing hydrogen fuel cells have also dropped. Some believe that hydrogen fuel cells are a superior option compared to electric-powered vehicles due to increased range and power. Another potential catalyst is that the incoming Biden administration is likely to be more generous in offering tax credits and subsidies to companies for green investments. If Democrats can win both Senate races in Georgia, and gain majority control of the Senate, that could lead to further gains for fuel cell stocks, like PLUG, as a more aggressive green energy plan will be expected.
PLUG is rated a Strong Buy by the POWR Ratings. It has an “A” for Trade Grade and Buy & Hold Grade with a “B” for Peer Grade and Industry Rank. It’s ranked #5 out of 59 in Industrial – Equipment.
F is not typically considered an EV stock because the bulk of its sales come from traditional vehicles with internal combustion engines (ICE). However, Ford is now manufacturing an electric Mustang and F150 truck.
I believe in the coming months investors are going to start pricing in the potential of its EV division. In addition, the stock is valued quite reasonably considering it’s expected to sell 2.5 million vehicles in 2021. It has a forward price to earnings ratio of 8.3 and a price to sales of 0.27. Additionally, auto sales are cyclical so the company should benefit from an improvement in economic growth due to the vaccine. Low-interest rates will also provide a marginal boost as financing will be more generous.
The POWR Ratings are constructive for Ford, as it has a Strong Buy Rating. It has an “A” for Trade Grade, Buy & Hold Grade, and Industry Rank with “B” for Peer Grade. Among Auto & Vehicle Manufacturers, it’s ranked #5 out of 34.
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NIO shares were trading at $45.13 per share on Thursday afternoon, up $0.46 (+1.03%). Year-to-date, NIO has gained 1,022.64%, versus a 17.17% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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