Tread carefully in electric vehicle stocks, this portfolio manager says

The promise is huge but so are the multiples on some of today’s electric vehicle stocks, which makes investment in the sector risky at best and an outright gamble in some cases. One way to approach the space, says portfolio manager Brendan Caldwell, is to think of EV companies not as automakers per se but as tech companies where innovation rather than production volumes will dictate success or failure.  

“It’s a tough sector,” says Caldwell, president and CEO of Caldwell Investment Management, speaking in a BNN Bloomberg segment on Tuesday. “I think Tesla’s something at a 130x earnings order of magnitude — and that’s forward earnings, that’s not the money that they’re making or not making right now.”

It’s been a wild ride for fans of electric vehicle investments this year, on the one hand with Tesla (Tesla Stock Quote Charts, News, Analysts, Financials NASDAQ:TSLA) rocketing ahead to become (briefly) a trillion-dollar company and pickup truck Rivian making its debut last month to a lot of fanfare but so far uninspiring results. Other names like Nikola Corp, Nio Inc and Canoo are in the mix.

In Canada, investors have The Lion Electric (The Lion Electric Stock Quote Charts, News, Analysts, Financials TSX:LEV) which has made news on contract wins for its electric buses and fuel cell maker Ballard Power (Ballard Power Stock Quote Charts, News, Analysts, Financials TSX:BLDP), both of which are down by about half for 2021.

As the traditional automakers are all gunning for the EV market as well, news on that front has been monumental, with companies like Volkswagen pledging to transform its fleet to 70 per cent electric by 2030 and fully electric by 2035 and Toyota aiming to put 70 different electric vehicle models on the road by 2025. 

The field definitely has its share of tailwinds, as governments worldwide are counting on electrification of transport being a key piece of their climate change puzzles and are not only building out infrastructure to support EVs on the road but are wooing car companies and battery makers to set up shop locally in aid of securing those sought-after factory jobs.

For investors, however, the challenge is in where to put your money. You could go for a high-risk upstart like Rivian or maybe a tried and true auto company like Ford or Volkswagen, but either way, it’s innovation that’ll drive development in the sector, says Caldwell, and that means you should be looking at the tech behind the company.

“It’s a pretty tough sector from a valuation perspective,” Caldwell said. “You’re seeing a lot of the old school car companies coming into the electric vehicle market. That’s on the one hand. On the other hand, the reason that you would buy an electric vehicle stock right now is to say that they’re not vehicle stocks at all.”

“They are, in fact, a way of transforming one’s life. They are computer stocks, they’re tech stocks there’s something more to them than just getting the person from A to B,” he said.

“I think that there will be tremendous opportunities in this space but I think what we are learning over this COVID period is that people’s need, desire and methodology for getting from A to B is going to change,” Caldwell said. “I’ve got four children all of driving age, only one has a [drivers license]. The next generation isn’t taking to driving like you and I took it as a sense of freedom So, I think you’re going to need to look at the electric vehicle stocks in a transformative way.”

One of Tesla’s supposed advantages is in its data collection where the company’s ability to install more and more sensors on its vehicles has put its AI-enabled car tech light years ahead of its competitors. 

Tesla’s rise in October and November coincided with an announcement from rental company Hertz that it would be buying 100,000 of Tesla’s EVs but the stock has since lost much of that bounce in recent weeks. 

Commenting on the Hertz announcement, Goldman Sachs analyst Mark Delaney said Tesla likely has a lot more room to grow in the rental car field with Hertz, whose 100,000 Teslas would make up about 20 per cent of its fleet.

“We expect there to be continued opportunities in this channel. Hertz typically only holds vehicles for a few years per its filings, suggesting additional sales over time, and this news could also incentivize other rental fleets to shift more quickly toward EVs,” Delaney said in an October 27 report.

Delaney maintained his “Buy” rating on Tesla while raising his target price from $905 to $1,125 per share, saying, ““We believe this news is important for Tesla, and while the 100K order is material on its own, we also believe that it will help the company to sustain strong growth and margins when considering the order in the context of other dynamics.”