The stock rout hasn’t spared EV investors.
Since the beginning of last year the momentum behind vehicle electrification seemed to be outrunning the pandemic and a brewing chip shortage: Tesla surpassed Facebook in market cap, EV upstarts were scooped up by special-purpose acquisition companies and lithium prices rose.
Recently, investors have shown more uncertainty, both in the technology sector and EV stocks. The S&P/TSX Composite Index entered correction territory last month and auto production is still hampered.
“We’re kind of waiting for this volatility around [interest] rates to subside. We do view it as an attractive longer-term opportunity, ” said Martin Grosskopf, vice-president and portfolio manager at AGF Investments, in an interview with The Logic, speaking broadly on the EV sector rather than individual stocks.
“We’ve seen valuations jump up in certain stocks, maybe beyond what the near-term fundamentals dictated.”
The downside scenario: Goldman Sachs analysts said the battery-metals market has peaked until a supercycle resumes in the second half of the decade. Citing “bleak” economic expectations, CIBC Equity Research recently slashed its price target for the auto-parts maker Magna International and dealership group AutoCanada, and downgraded Martinrea, as well as the EV-bus and -truck company Lion Electric and bus company NFI.
“In this rising rate environment, long-duration growth names such as [Lion] have fallen out of favour,” CIBC’s analysts wrote. In the event of a recession, they said, “pure-play auto suppliers do not show well, given that auto production is already running at suboptimal levels.”
Why it matters: If funding dries up, what happens next? Ford CEO Jim Farley recently said he expects many of the smaller players to consolidate.
The boom-and-bust cycle hitting some moonshot companies is still healthy for the overall industry, because even the fly-by-night firms pushed incumbent automakers to wake up to electrification, said Nick Mersch, portfolio manager at Purpose Investments, in an interview with The Logic.
“But I would avoid companies that have heavy capex investment cycles without that operational excellence behind them,” said Mersch.
“These areas will have massive participation and a massive market as the [internal combustion engine] fleet converts to EVs. We are going to see a lot of the fundamentals start to improve, but people definitely have to go back to the valuation drawing board.”
The fallout of falling stock prices: Lion Electric and Martinrea were among the technology companies dropped from the S&P/TSX Composite index this week, and while S&P Dow Jones Indices would not say whether it was tied to stock performance, both companies have seen declines over the past year. Meanwhile, one analyst said that the bus-maker NFI’s low stock price could make it an acquisition target.
On the plus side: Fellow Canadian auto-parts maker Linamar was spared from CIBC’s downgrade list, as the analysts said it has enough cash on its balance sheet to return some to shareholders and make acquisitions. The Toronto Stock Exchange launched a new S&P/TSX Battery Metals Index, saying, “Global demand for battery metals continues to gain momentum.”
“When you’re baking in a company that might be a real winner in battery technology five or 10 years from now, but they’re in a massive investment phase today … it looks less attractive than a company that just got massive pricing power—an oil and gas company, for instance, that’s minting free-cash flow today,” said Grosskopf.
“It does not change the relative attractiveness of the longer-term opportunity” around electrification, he said, which “has actually strengthened.”