2 Electric Vehicle Stocks to Buy, 2 to Avoid

Electric vehicle (EV) stocks have been one of the best-performing groups of the year. On a YTD basis, the KraneShares Electric Vehicle and Mobility ETF (KARS) is up 25%, while the S&P 500 is just 5% higher…

This outperformance has continued even in the short-term. In September, the S&P 500 was down nearly 5%. Yet KARS was flat for the month. Additionally, KARS is 11% above its pre-coronavirus highs, while the S&P 500 is around the same level.

This is particularly impressive since KARS is composed of many high-beta stocks which tend to see bigger losses when the market is selling-off. KARS’ resilience is an indication that investors are using the market’s weakness as an opportunity to accumulate shares. It’s also a sign that its outperformance is likely to continue in 2020’s final quarter.

Another development that is constructive for the sector is the strength in lithium. Lithium is a necessary component of batteries. Its rising price and the price action in lithium miners is further confirmation of the bullish thesis for the EV sector.

Catalysts

There are three major catalysts for the strength in the sector.

  1. The odds of a Biden win are increasing. Further, the odds of Democrats winning a majority in the Senate have risen to 65%. This has fueled gains in EV stocks as Biden’s energy plan proposes large tax credits for EV purchases, investments in charging infrastructure, and a cash for clunkers program centered around EVs.

  2. The quality and performance of EVs are improving at a rapid rate which is making them more competitive with gas-powered vehicles. Due to improvements in batteries, it’s expected by 2024 that electric-powered cars will have the same range and similar costs as gas-powered cars even without subsidies.

  3. In 2020, the premium for growth stocks has increased due to falling interest rates and economic growth expectations. EVs are one of the few industries with above-average growth prospects in the coming decades. Right now, there are 8 million electric vehicles on the road, and they account for 5% of all vehicle sales. Over the next decade, it’s expected that electric vehicle sales will surpass gas-powered vehicles, and total annual sales will exceed 100 million.

2 Stocks to Buy and 2 to Avoid

Despite these positive catalysts and favorable trends, investors should still be judicious in picking the best stocks. It’s true that in a bull market, a “rising tide lifts all boats.”

However, at a certain point, reality rears itself and punishes the stocks that are driven by hype rather than genuine improvements in their business. The opportunity in EVs is also attracting well-funded startups and legacy car companies. Weaker companies will struggle in a more competitive environment.

In EVs, two companies with the strongest businesses are Tesla (TSLA) and Plug Power (PLUG), while investors should avoid NIO (NIO) and Nikola Motors (NKLA).

Tesla (TSLA)

Tesla is 15% off it’s all-time highs. Some of the catalysts for this decline are that it wasn’t chosen for inclusion in the S&P 500 and it underwhelmed investors on Battery Day. However, it’s one of the best-performing stocks in the market with a nearly 300% YTD gain and an 840% gain over the last 12 months.

Despite these impressive gains, TSLA has further upside given that it’s the leading company in three trillion-dollar markets – EVs, autonomous driving, and batteries. In all of these industries, Tesla is likely to benefit from network effects and economies of scale that will increase the chances of its products being cheaper and more technologically advanced than its competitors.

The POWR Ratings also have a constructive view on the stock as it’s rated a…

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