Trading Tesla and the (New) Electric Vehicle Sector
Shares in electric vehicle (EV) manufacturers have skyrocketed in 2020 despite lagging sales volumes.
Amid a crazy trading year, the electric vehicle (EV) narrative stands out as one of the most riveting.
The EV niche of the financial markets has been on fire since the market bottomed in March, and it doesn’t look likely to cool down anytime soon.
Based on the high returns in EV stocks this year, one would assume that sales of such vehicles was likewise skyrocketing. However, sales of electric vehicles were actually down 28% in the United States during the first half of 2020, as compared to last year.
Globally, EV sales have fared slightly better in 2020, but the overall trend has still been negative—down 14% in H1 2020. One bright spot for EV sales in 2020 has been the European market, where growth surged 57% during the first half of the year.
The global poster child for the electric vehicle revolution is, of course, Tesla (TSLA). In the light vehicle category, Tesla EVs constitute about 18% of total EV sales globally. And as many are well aware, Tesla shares have rocketed higher in 2020, gaining over 600% year-to-date.
Tesla, however, isn’t the only EV-focused company that’s seen its fortunes rise substantially in 2020. Other big winners include Li Auto (LI), Nikola (NKLA), Nio (NIO), Workhorse (WKHS) and Xpeng (XPEV), as illustrated in the chart below.
So what put EV traders and investors in such a frenzy, especially given lackluster EV sales demand? As with many historical hot corners of the stock market, it likely boils down to potential—or perceived potential.
EVs have been around for a long time, going back as far as William Morrison’s original invention in 1891, but the EV revolution might have finally reached critical mass in large part due to the fame of Tesla and its frontman, Elon Musk.
As with any crescendoing business story, one portion of that success can usually be traced back to strong demand. Tesla arguably made EVs “cool,” and the company has parlayed that success into large profit margins.
But outside of Tesla there’s another narrative propelling the EV revolution—generally referred to as the “green revolution.”
The green revolution is predicated on the belief that human activity is detrimentally impacting the health of the planet. One of the major concerns is that carbon dioxide emissions stemming from the widespread burning of fossil fuels has catalyzed rising global temperatures—a phenomenon referred to as “global climate change.”
Due to strong buy-ins from many sovereign governments around the world (not to mention the citizens themselves), momentum is building to reduce carbon emissions worldwide—alongside a myriad of other initiatives intended to minimize humanity’s negative impact on the natural environment.
Superficially, the electric vehicle story fits these initiatives like a glove. Unlike traditional gas-powered vehicles, EVs produce almost zero carbon emissions on the road. Due to this environmental benefit, many governments around the world have deployed accommodating policies to assist with EV proliferation (i.e. subsidies and tax credits).
In the United States, for example, consumers can earn a valuable tax credit when purchasing an EV. The federal tax credit is typically only available on the first 200,000 units produced by a given electric vehicle manufacturer, which is why they are no longer available for purchases on Tesla and General Motors (GM) electric vehicles.
Circling back to EV-focused stocks, one can see how these government policies have transformed the potential for EV penetration in the light vehicle market. And current expectations suggest that government support for EVs is only going to grow more accommodating in the future.
The United Kingdom, for example, has banned the sale of new gas-powered vehicles starting in 2035. That’s extremely bullish for any non-gas-powered vehicle manufacturer over the middle- to longer-term. And the U.K. isn’t alone. From 2025, it will be illegal to sell new petrol/diesel cars in Norway.
Framing the future around those policies certainly puts the EV revolution in fresh perspective, and it helps explain why the niche has acted so explosively in 2020.
On the other hand, there are two sides to every coin, and there are plenty of market participants who likely think the EV rally is overdone. With conviction on both sides of the market, there should be plenty of new investing/trading opportunities presented in the EV space in the coming weeks and months.
To follow all the EV action, readers may want to add the aforementioned stock symbols to their watchlists. To follow everything moving the markets, readers can also tune into TASTYTRADE LIVE (weekdays, 7 a.m. to 4 p.m. Central Time).
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Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about any of the topics covered in this blog post, or any other trading-related subject, to support@luckboxmagazine.com.
