For years, Tesla (NASDAQ:TSLA) was synonymous with electric car stocks. While other automobile manufacturers have toyed with electric vehicle technology, arguably none had put as much skin in the game as Elon Musk and company. But with the surge in demand for EVs, we’ve likewise seen a rapid rise in publicly traded corporations specializing in this field. But many are left wondering how to invest for growth in this exciting market without getting burned.
Undoubtedly, growth investing is a pivotal component for shorter-term and longer-term strategies. Even if your goal as a young investor is to facilitate a comfortable retirement, you most likely can’t get there by playing it safe. As with anything in life – whether making a career move or buying a house – you’ve got to take risks. At the same time, you can’t just throw money at every opportunity, especially with highly variable markets like electric car stocks.
Don’t get me wrong – not every EV player is a speculative affair. Some I would argue are stable companies, if not outright boring. Therefore, it’s critical to know how to invest for growth rationally. With new markets, there are undoubtedly opportunities. But with that comes the specter of the unknown.
If you’re looking to buy a new car, many consumer advocacy groups will recommend that you avoid buying the first production year of a particular model. That’s because the kinks haven’t been worked out. And this becomes a greater issue if you’re dealing with cars that have integrated new technologies.
It’s really the same principle on how to invest for growth. Rather than just buying the latest EV-related special purpose acquisition company (SPAC), you should investigate the target organization. Questions you may wish to ask are:
Does the EV firm have the right product or business plan?
Who is the management team and is it experienced in EVs or auto development?
Does the pricing for the electric car make sense relative to what it offers?
These are examples of questions you should ask of any growth investing opportunity relative to its particular sector. However, with electric car stocks, the sudden rush of participation suggests that there will be at least a few losers. Here are some of the best ways on how to invest for growth profitably.
Branding Is Tops for How to Invest for Growth
Though Tesla is never a charge up away from scoring front-page news, not all of it is positive. Case in point is an incident that happened near Dublin, California. As Nathaniel Galicia Chien was driving with his parents in their right-off-the-showroom-floor Tesla Mode Y, he heard a gush of air seep in.
In an interview with TheVerge.com, Chien recalled, “I thought a window was open…but half a minute later the entire glass top of the roof just flew off in the wind.” According to the local NBC news channel, the all-glass roof ripped off the chassis while the family was driving down Interstate 580.
This wasn’t just embarrassing for Tesla; it very well could have been deadly. But will it impact TSLA stock? Probably not.
As terrible as this defect looks, Tesla has an incredibly powerful brand. In a way, the company is like President Donald Trump. It can do whatever it wants and get away with it – well, within reason. And that’s why if you want to know how to invest for growth successfully, and especially with electric car stocks, you go with brand power.
Look, Tesla’s EVs may not be all that special, as this incident demonstrates. Similarly, Apple (NASDAQ:AAPL) wowed the world with the iPhone but competitors have caught on. Yet Apple remains on top because of its brand. That’s a key attribute to consider for any kind of growth investing.
People, People, People
When it comes to starting a high-traffic business, everyone recommends that you consider location, location, location. You could have the best business in the world and yet fail in the bottom line because of where your company is situated. Therefore, smart entrepreneurs will invest whatever they can to secure the best location they can afford.
Not surprisingly, the same principle applies for many successful EV manufacturers. You want to see your target companies invest in the right executives and managers working in the right roles. To put it another way, it’s all about people, people, people.
Although it sounds cliché, people matter. For instance, Ford (NYSE:F) is a traditional automaker that was lagging in passenger car interest. Recently, the American icon pivoted toward EVs, introducing to the public the Mustang Mach-E. From a technical standpoint, everything about this debut was top notch: the Mach-E looked amazing while providing great performance and long range.
There was just one problem for automotive enthusiasts: the new Mustang was an SUV!
As you know, Mustangs have always been two-door pony cars. To have the Mustang logo slapped on an SUV was a sacrilege for many. But the problem is that fewer people are buying such sports cars. To that end, Ford made the business decision to go with what was right for the company.
That’s the kind of smart, forward-looking strategies you need. Therefore, if you want to know how to invest for growth, study the leadership team.
The Spirit of Innovation
If you’ve followed my work, you may get a sense that I despise mediocrity. If you don’t, well, let me tell you straight up: I despise mediocrity.
Honestly, I believe mediocrity and the acquiescence to it is the single-biggest catalyst for American failure. In my view, all our troubles – racism, government corruption, moral decline, you name it – stems from mediocrity. From parents refusing to rear their children properly to grown adults always pointing the finger at something or somebody else, mediocrity drives these negative behaviors.
In a similar fashion, a company’s approach to mediocrity – whether it embraces it or eschews it – represents a pivotal indicator. If you want to know how to invest for growth with reasonable probabilities, elect organizations with an innovative spirit.
Among electric car stocks, one name that comes to mind is Toyota (NYSE:TM). Following the destruction of World War II, Japanese manufacturers like Toyota had to scrap for scraps. In that period of extraordinary obstacles came the mainstreaming of just-in-time inventory management. Much of the efficiencies that Toyota is known for arose from this innovation.
Today, Toyota is one of the leaders in advanced EV battery technology, researching and developing solid-state batteries. Sure, Toyota could easily rest on its laurels but that’s not what its brand is about. For those seeking growth investing opportunities, look for the spirit of innovation, not mediocrity.
Use Some ‘Quant’ for Growth Investing
Although the above ideas on how to invest for growth are useful for filtering out the best electric stocks for your portfolio, they have an element of subjectivity involved. For instance, the results of branding are easy to quantify: you simply look at metrics such as deliveries or average selling price. But the brand itself and the power it conveys is subjective.
Some people love Tesla. And others hate the brand so much that they can’t help but deface it.
However, that doesn’t mean that everything about electric stocks is subjective. For instance, I noted in early September that Tesla shares had a strong correlation with the equity price action of Plug Power (NASDAQ:PLUG). Granted, these are different businesses but what connects them is their development of vehicles with alternative energy.
Apparently, that’s good enough for PLUG investors. And this is the primary reason why I said buying the stock is like buying TSLA for $13 (the price of PLUG at the time of writing). Earlier this month, I noted that the strong correlation still exists. Coincidentally, both stocks, while featuring different chart patterns, have the same bullish implication.
Therefore, before you dive into one of the electric car stocks available, compare their performance to a proven leader like Tesla. If they generally trend along the same trajectory, you will have greater confidence in that target asset’s performance.
Whether you’re trying to figure out how to invest for growth successfully in the EV market or some other unrelated sector, you should focus on the brass tacks. Especially with any technology name, don’t allow yourself to be distracted with the front-facing innovations and the marketing literature.
Absolutely, listening to what a CEO has to say about his/her company is important. But objective analysis is what will keep you and your portfolio happy.
To that end, I encourage anyone interested in EV growth investing to consider the business proposition. Yes, that sleek, sexy electric car or SUV may entice your heart. But without the combination of a viable business plan and target consumer market among other metrics, you may be looking at a speculative investment.
Now, I’m not trying to moralize here because I’ve been known to dabble with high-risk, high-reward ventures myself. But when I do, I understand what I’m getting into.
A good example to showcase is Electrameccanica Vehicles (NASDAQ:SOLO). Known for its flagship Solo, this EV gets its name because it has three wheels and only seats the driver. The reason? Electrameccanica specializes in commuter vehicles, which eliminates the inherent waste of people driving family vehicles to commute to work.
For me, one of the biggest challenges is the Solo’s price. At $18,500, that might be too much for a single-purpose vehicle. Additional market research will best determine if such a business model is appropriate for your growth investing portfolio.
The Electricity or the Vehicle?
Moving forward, one of the key questions to ask regarding how to invest for growth in the EV market is this: will the investment narrative focus on the technology or the sentiment?
For full disclosure, I’ve never driven an electric vehicle nor even a hybrid so I’m not personally familiar with the driving experience. Nevertheless, I’ve spoken to many Tesla owners. And they swear that once they’ve gone electric, they’ll never go analog. Reasons for this include the whisper-quiet ride along with the various technical bells and whistles.
Perhaps, though, they are enamored with the Tesla brand or the newness of the technology. But once this market becomes more fleshed out, will drivers still gawk at Tesla’s technical wizardry?
Or will they instead gravitate toward companies that feature a superior driving experience? That’s one of the interesting narratives behind Spartan Energy Acquisition (NYSE:SPAQ), which is poised to become Fisker through a reverse merger. Undoubtedly, SPAQ stock is risky. However, what attracts speculators is legendary car designer Henrik Fisker, who designed the company’s gorgeous Ocean SUV.
In my opinion, Fisker is a car company leveraging technology. In contrast, some of its competitors are arguably tech firms building cars.
One side of this coin will probably win out but which one? Again, focused market research may give you an edge in your growth investing portfolio.
Keep an Open Mind
Lastly, you don’t want to confine your portfolio into a corner unnecessarily. As with anything, you should keep an open mind. Life is much more interesting that way.
For instance, Ferrari (NYSE:RACE) will probably never build an EV. Enrico Galliera, the Prancing Horse’s chief commercial officer, had this to say about the subject:
We firmly believe that battery technology is not yet developed enough to meet the needs of a supercar. In the next five years, we do not believe the technology will be able to meet the needs of a Ferrari…
As soon as electrified technology is developed, that will allow us to produce a car that fits with our position. Then why not? But the key is the technology. We will not just make a Ferrari that’s electric for the sake of it.
Many EV fans took to the blogosphere to blast Ferrari as a yesteryear car company. But let’s also keep in mind that the company’s LaFerrari exotic is its first hybrid vehicle. Of course, by hybrid, we don’t mean a Prius. Instead, Ferrari is utilizing EV battery technology to bolster its combustion engine.
Technically, though, this makes Ferrari somewhat of an electric car play because it’s utilizing the innovation. Perhaps not to the liking of EV buyers who are making the switch to protect the environment, but still – Ferrari’s keeping an open mind. Maybe you should too?
On the date of publication, Josh Enomoto held a long position in F and SPAQ.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
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