Growth stocks have been outperforming value stocks over the past number of years. Perhaps the best comparison is between the Powershares Nasdaq 100 ETF (QQQ) and the iShares Russell 2000 ETF (IWM). Over the last 5 years, QQQ is up 161%, while IWM is up 45%.
Of course, such outperformance is driving increased interest in growth stocks. Currently, most growth opportunities are found in areas like cloud computing, E-Commerce, fintech, and electric vehicles (EV).
One reason for the outperformance of growth stocks is that overall economic growth has slowed. Therefore, there is increased demand for the few growth opportunities available to investors in public markets. Additionally, multiples for growth stocks are also expanding in response to the Fed’s zero-interest-rate policy which ensures that liquidity in financial markets remains abundant.
While many investors have been hoping for a rotation from growth-to-value, I don’t think this is likely. The coronavirus will ensure that economic growth remains weak relative to the pre-coronavirus trend. While there were some hopes that a vaccine would be available later this year or early next year, recent statements by Dr. Fauci indicate that social-distancing and mask-wearing may have to continue into 2022. This means it’s likely that economic activity in certain areas like travel, hotels, and dining will remain depressed, even after today’s positive announcement from Pfizer.
In terms of rates, the Fed has pledged to not “even think about” raising them until 2022. Further, the election outcome reduces the chances of a meaningful energy or infrastructure plan which could have boosted growth rates.
EV is a Growth Industry
This means that investors should continue focusing on growth stocks as their string of outperformance is unlikely to end anytime soon. The recent market action has created buying opportunities in several, high-quality names.
Last week, we saw a strong rebound in the stock market. Major averages like the S&P 500 and Nasdaq Composite are once again making new highs. And, many growth stocks have already broken out to new highs on strong volume.
To find the most promising growth stocks, investors should look at the parts of the economy that will continue to grow larger and identify the companies that can win market share in these expanding industries. These trends can last for years, and multiple companies can end up as winners.
For example, two recent examples in the last decade were smartphones and cloud computing. Nearly, every consumer bought a smartphone, and nearly every business has had to spend on cloud computing to stay competitive.
I believe that electric vehicles (EV) are in the early innings of a similar explosion in growth. In 2019 about 325,000 electric cars were sold in the US. According to estimates from the IEA, 5 million electric cars will be sold in the US in 2030. By 2040, EV will have replaced gas-powered vehicles as the dominant form of transportation.
The major factor is the improvements in electric engines and batteries resulting in greater range and power. Both are following a similar trajectory as other types of technology which drop in price while improving in quality. As a result, it’s expected that electric cars will become cheaper than gas-powered cars within the next decade. And of course, this timetable could be accelerated with government subsidies as has been proposed by Joe Biden during his campaign.
TSLA and NIO are Current Leaders
Currently, the leading EV stocks are Tesla (TSLA) and NIO (NIO). Both stocks have been among the strongest performers in 2020, as they are the leaders in terms of market share and have established loyal followings.
So, it’s not entirely surprising that investors have been focused on these names. While these stocks can certainly keep continuing higher, investors should understand that there is more risk and less upside since valuations are rich, and sentiment has gotten frothy.
Rather than chasing NIO or TSLA, investors should consider some of the lesser-known EV stocks. The strong price action of NIO and TSLA is evidence that EV stocks can generate huge returns for investors if they can execute on their vision. Li Auto (LI), Lordstown Motors (RIDE), and Fisker (FSR) are three EV stocks that have the potential for big gains in the coming months:
Li Auto (LI)
LI is a Chinese EV company that is targeting customers in more rural areas. While the Chinese government has been aggressively boosting the industry through subsidies, tax credits, and accelerated permitting, one remaining obstacle is the lack of charging infrastructure that makes EVs not viable in many rural areas.
LI is serving this market with its electric SUV that also has onboard, gas-powered generators. This solves the range issue as LI’s vehicles can run on gasoline if necessary. As charging infrastructure becomes more widespread, it will be able to transition to focusing solely on EVs.
Many analysts believe that LI’s strategy has a good chance of working given that it’s competing in a space with less competition. Most of the EV makers in China are in urban and suburban markets.
LI started production in late-2018 after several prototypes. In October of this year, it delivered 4,000 vehicles. Currently, it has 31 retail outlets in 26 cities. For EV makers, the toughest part has been the process of increasing production while maintaining quality.
LI seems to be handling these tasks adeptly. Due to increasing production, costs have been falling on a per-unit basis, leading to higher gross margins. Goldman Sachs believes LI will be selling 445,000 cars annually by 2025 and become profitable by 2024.
Lordstown Motors (RIDE)
Lordstown Motors went public through a SPAC in August. From this announcement, it tripled until it topped in September. From this peak, RIDE is down by 45%.
This decline could provide a low-risk entry point to any investors intrigued by this company’s long-term potential. RIDE is working on developing and producing electric trucks. This is potentially a bigger opportunity than electric cars since TSLA is the only other current company with a working electric pickup truck prototype.
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The SPAC helped RIDE generate $675 million in cash. It plans to use these proceeds to begin production in late-2021. General Motors (GM) has invested $75 million in the company and is providing logistical and operational expertise to the company.
If RIDE can continue making progress in starting production, then it could have a similar upside to other big winners in the EV space.
FSR has also followed a similar trajectory to RIDE. Upon its merger announcement, it gained more than 100%. Since then, it’s given back the bulk of these gains.
FSR is developing electric cars, and its early prototypes have earned plaudits in terms of design, power, and range. The challenge for investors is that FSR is not expected to begin production until 2023.
FSR’s founder and CEO are Henrik Fisker who is renowned as one of the best auto designers in the world. The Fisker Ocean is expected to debut at a $40,000 price point which would make it instantly competitive with gas-powered and electric SUVs.
At today’s price, the stock is worth buying if an investor believes that Fisker can gain market share in the electric market. While there will certainly be competition, Fisker has a headstart in that it’s been working on EVs for more than a decade. Additionally, history tells us that new categories mean new companies often emerge as the winners. If the Ocean can gain traction among consumers, then it can expand into different categories, similar to TSLA and NIO.
TSLA shares were trading at $437.40 per share on Monday morning, up $7.45 (+1.73%). Year-to-date, TSLA has gained 422.79%, versus a 13.38% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles.3 Lesser Known Electric Vehicle Stocks With SKY HIGH Potential appeared first on StockNews.com