The Perfect Investments for the Electric Car Revolution
Just as I entered the airport exit there came the unwelcome sound of a loud “clank” from my car’s rear axle. And the clanks kept coming as I limped to the passenger pick-up point. I was there to meet a writer I had just hired who was visiting company headquarters for the first time.
If he was surprised when the first words out of my mouth were, “Do you know anything about cars?”, I was more surprised when he matter-of-factly assured me that he did know some things about cars.
After getting the luggage loaded, we drove a couple hundred yards further to where I could safely pull over. Before I could call a tow truck, my passenger leaped out of the car, removed his jacket, and squirmed beneath the vehicle. He emerged five minutes later, hands full of grease and grime, and told me it was safe to proceed. I still don’t know what he did down there but the clanks were gone.
My passenger that day ten years ago was today’s contributor, Dave Sterman. I’m telling you this to assure you that Dave does, indeed, know about cars. And Investing…
— Bob Bogda, Editor
P.S. Like what you see? Don’t like what you see? Let me know.
As a lifelong “motorhead,” I never imagined I’d have much interest in electric cars. Clutch pedals, engine revs and throaty exhaust burbles make my heart sing. But the first time I took an electric vehicle (EV) out for a spin, I was hooked. I still get a thrill every time I “step on the gas” of my Nissan Leaf and take note of its great pep and poise. (EVs have their battery packs sit down low in the chassis, and their low center of gravity delivers a perfect blend of ride and handling). My gasoline-powered cars: Collecting dust in the garage these days.
Soon enough, I’ll have a lot of company. Auto makers as diverse as General Motors, Jaguar and Mercedes have all pivoted their Research & Development (R&D) teams to produce a wave of new EV models over the next few years. Car and Driver magazine recently tallied up 41 new EVs that will come to market over the next two years. Allied Market Research says that sales of EVs are poised to surge 23% annually through 2027.
Sadly, investors seem to be missing the mark when it comes to finding the perfect EV stocks. Shares of EV-focused firms such as Hyllion (HYLN), Nikola (NKLA) Spartan Energy (SPAQ), Diamond Peak Holdings (DPHC) all have market values in the $4-7.5 billion range. And they have zero sales. At this point, they are a hope and a dream.
Meanwhile, Tesla (TSLA) remains the poster child for EVs. Yet, shares trade for 11 times projected 2020 sales and 251 times projected 2020 profits. Instead, why not focus on a pair of investments that are poised to benefit from the EV onslaught while sporting more reasonable valuations?
Canada’s Magna International (MGA) has steadily grown by providing outsourced components and production services to a range of global automakers. But over the past few years, Magna has emerged as the bridge to help its clients become full-fledged EV builders in their own rights. Back in 2017, the firm previewed its EtelligentDrive platform, offering a comprehensive electric powertrain that other automakers could easily design into their own vehicles.
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And through its Steyr division, Manga is already building electric cars from the ground up. The firm’s factories make the Jaguar I-Pace, a Chinese EV named the ArcFox Alpha-T, which travels an impressive 406 miles on a single charge, along with more traditional gas-powered cars such as the Toyota Supra. And earlier this month, Magna said it will build the upcoming Fisker Ocean electric-powered SUV. (Magna will also become a minority owner in Fisker). Magna also has a tentative deal to build vehicles for EV startup Canoo.
This past August, Magna named Sherif Markaby as its new head of R&D. Markaby is considered to be one of the industry’s top EV engineers, having most recently headed up that segment at Ford Motor (F).
Magna is also a great play on the other key auto trend: Advanced Driver Assist Systems (ADAS). The firm is one of the world’s top sellers of vehicle cameras, sensors, radars and ADAS chips.
To be sure, even as it builds a head of steam with electric vehicles and ADAS components, Magna retains an existing and robust business supplying parts for traditional gas-powered cars. In 2021, the firm is expected to post $37 billion in sales and earn around $5 a share. That compares with expectations for $31 billion in sale this year, and earnings of around $2 a share. Recently trading under $55, this stock is valued at less than 11 times projected profits.
Action to Take: Consider buying shares of Magna International (MGA) under $62 and taking your profits when they reach $80.
For those of you who prefer to own a basket of companies that are focused on the EV and autonomous driving markets, consider the GlobalX Autonomous & Electric Vehicles ETF (DRIV). The fund carries a 0.68% annual expense ratio and has around $57 million in assets. Leading tech firms such as Tesla and Nvidia are among the top holdings in this fund.
But a word of caution: tech stocks have staged remarkable gains in 2020, pushing this fund up 22% since the year began. So, shares may prove to be choppy in the near-term if tech stocks are hit by profit-taking. That makes this more suitable as a long-term investment rather than a short-term trade.
Action to Take: Consider buying shares of the GlobalX Autonomous & Electric Vehicles ETF (DRIV) up to $23 and holding them until they reach $30.
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Dec 14th, 2020