I have a challenge for you and me:
I want us to become “Teslanaires” by the end of this decade. By that, I mean earning a million dollars by investing in electric vehicles.
But there’s one catch. I want us to start with a $10,000 initial stake.
That’s because turning a $700,000 retirement account into $1 million is easy, especially if you have time on your side. Just invest in a basket of mega-cap electric vehicle (EV) companies and wait long enough for compound interest to take over. Firms like Lucid Motors (NYSE:CCIV) — worth almost as much as Ford (NYSE:F) or Honda (NYSE:HMC) — fall into that camp. (Even if it becomes the next Tesla (NASDAQ:TSLA) in eight years, CCIV will only turn $10,000 into $140,000).
My challenge involves finding companies like Tesla back in 2010 when it was a split-adjusted $6. That means buying up promising startups that could 10x your money in two to three years, and then doing it again and again until we reach $1 million by 2030.
So, where can we find these Moonshots? Fortunately, the 2020 electric vehicle craze spawned a plethora of both great and terrible Moonshot bets. And with some luck, the next millionaire-makers might be hiding among the tiny startups of the electric vehicle world.
Rising Stars: Four-Wheel Electrification
Oil hit a six-year high this week, a fact American motorists undoubtedly experienced at the pump last weekend.
“No! That is not OK,” said one interviewee about gas reaching $6 per gallon in the San Francisco Bay Area. “The gas prices are not OK.”
But there is one thing that’s better than most: electric vehicle Moonshots.
For all the hype about electric vehicles, 98% of new cars are still traditional gas-guzzling cars. And that means incredible growth potential. According to a Pew Research poll, almost 40% of Americans are considering buying an EV as their next car. If America starts tracking the rest of the world in EV adoption, demand could triple in three years.
FINDING THE NEXT TESLA
Becoming a Teslanaire from electric vehicles, however, isn’t straightforward. That’s because cheap EV Moonshots today either have 1) unproven potential or are 2) provenly bad (which is why they’re cheap).
- Unproven Potential: Lordstown Motors (RIDE). The firm has yet to produce a working prototype; One of their vehicles burst into flames last January during a Michigan road test. Moreover, short-sellers claimed RIDE padded their pre-orders with zero-commitment “letters of intent.”
- Provenly Bad: Workhorse (WKHS). Twelve years of development and only six vehicles sold last quarter. WKHS lost a massive $6 billion USPS contract when a vehicle almost rolled into a test driver.
Even Tesla itself looked questionable in the early 2010s. Some early models could only travel 160 miles before needing an overnight charge. Going from New York to Washington, DC, would have been almost as fast on a bicycle.
Yet, all three companies reached a $5.5 billion valuation without generating significant sales. And that’s plenty of juice for a Moonshot bet.
REE Automotive (NASDAQ:VCVC). Starting us off is REE, a pre-merger firm trading at its $10 merger price. Much like Ford and Hyundai (OTCMKTS:HYMTF), REE is taking a “skateboard” approach to building cars. But where it differs is in value. With a $3.1 billion valuation, this firm has the 10x potential that few might otherwise enjoy.
Lion Electric (NYSE:LEV). Lion was founded in 2008 to replace Canadian school bus maker Michel Corbeil. Since then, the EV startup has moved into electric buses. In May, the firm inked a 260 all-electric bus order with Quebec, adding to the 390 already delivered. If it proves itself, Lion’s products (including a Class 8 electric truck) could pick up where Nikola (NASDAQ:NKLA) left off.
Canoo (NASDAQ:GOEV). The beleaguered EV startup has changed its business model more times than Mr. Moonshot can count. Yet, the company seems to maintain its retail investor fanbase. Any good news from its R&D department could quickly turn into a 5x feeding frenzy.
XL Fleet (NYSE:XL). The fleet electrification company has all the signs of a potential short squeeze: a high profile short-seller, an illiquid stock, and a management team that seems willing to say whatever investors want to hear. Though the 11-year-old company lost almost as much cash in 2020 as they reported in revenues, don’t discount the ability of retail investors to turn a provenly bad company into the next hot meme.
MIX OF BOTH
Hyliion (NYSE:HYLN). The engineer in me says that Hyliion’s technology won’t replace lithium-ion batteries anytime soon. Short-sellers, however, will dismiss the “hydrogen revolution” at their own risk. Though Hyliion has gotten panned for only offering “a small percentage” in fuel efficiency, retail investors have bid up prices of similar stocks before.
Will any of these companies become the next Tesla? It’s hard to know — existing firms from Magna International (NYSE:MGA) to privately-owned Vitesco Technologies aren’t standing still. And Tesla isn’t standing still either. But are these small companies better bets than Lucid for turning $10,000 into $1 million? You betcha.
Falling to Earth: Inflation Expectations
When lumber prices reached a record high last month, inflation was supposed to bite. Prices were meant to rise. The trillions in free stimulus had to go somewhere, didn’t it?
Instead, lumber prices have since dropped 50%. Corn, soybeans and lean hogs are also down double-digits from their peaks. Of the major commodities, only OPEC-controlled oil has largely escaped deflationary pressures.
In short, that’s because the dollar is rising. Commodities, which traders generally price in U.S. dollars, have an inverse relationship with the value of greenbacks. In other words, a strong dollar makes goods cheaper.
Fortunately, the metals and mining firms I picked out last month have held their ground. A late-stage recovery is still good for basic material Moonshots such as Peabody Energy (NYSE:BTU), Hallador Energy (NASDAQ:HNRG) and Synalloy (NASDAQ:SYNL) regardless of near-term inflation expectations.
But other commodity plays are starting to unwind. Egg producer Cal-Maine Foods (NASDAQ:CALM) is finding itself squeezed between volatile commodity inputs and stagnant grocery store prices. Meat producer Tyson (NYSE:TSN) is feeling the same pinch.
I’ve never been a huge fan of consumer staple plays as Moonshots (unless they’re extraordinarily cheap or have excessive leverage). That’s because guessing economic conditions might earn you 10% here and there; consumer staples are low-risk, low-return by their nature. Unfortunately, shorting these companies is also a recipe to get slowly burned by dividend payments.
So, what should you do now that inflation is sagging again? Firstly, it’s time to sell out of lumber and other agriculture-based businesses. Momentum Master rules tell us it’s better to cash out of mean-reverting commodities when they’re falling. (You can read more about the Momentum Master play here). Secondly, don’t expect inflation to stand still — prices have a strange way of surprising investors. And finally, stay focused on assets that are doing well — reopening stocks, some altcoins and housing plays should do well as people start to spend money again.
Interesting Reads: Moonshots and Madness
We know that Baby Doge Coin (CCC:BABYDOGE-USD) doesn’t have much innovation behind it. (I’ve written before that their developers copied 97% of its code from Safemoon (CCC:SAFEMOON-USD). But should you care? Luke Lango and his team give their thoughts.
It’s great to ride the momentum train, but Joanna Makris is starting to sound the warning bells on CCIV. For those who are comfortable selling on strength, her article is certainly one to read.
Brett Kenwell gives his pick for biedexmarkets.com.com’s Best Stocks for 2021 contest. His pick is none other than Bed Bath & Beyond (NASDAQ:BBBY). Here’s why this meme stock could hold more juice than traditional investors expect.
By the Numbers
|$3.1 million||The number of electric vehicles sold in 2020, according to research from market research firm Canalys.|
|7%||Fraction of global electric vehicle production sold in the U.S. That lags behind America’s 23% share of the total automotive world market.|
|100%||The percentage of federal government vehicles President Biden has vowed to turn electric. However, the 650,000-strong fleet could take decades to replace fully.|
|0.5%||Share of all-electric vehicles run by the federal government according to most recently released data collected by technology news site Ars Technica.|
Closing Thoughts: The Lucid Motors Puzzle
Many investors love to label Lucid as “the next Tesla.” And from a production side, it could conceivably out-produce its big brother someday; there’s no cosmic rule saying that Tesla needs to be No. 1 forever.
But there’s one problem: Tesla was cheap when it first IPO’ed. The $17 IPO price (a split-adjusted $3.84) would have valued the automaker at $1.7 billion. An investor could have turned $10,000 into $1.7 million in little more than 10 years.
Meanwhile, CCIV’s $64 pre-merger price would have valued Lucid Motors at more than $100 billion in the days before the SPAC merger. Achieving Tesla-like returns is impossible when you’re already a mega-cap firm.
So, why do investors believe it is worth so much?
Part of it could be SPAC accounting. Many believe CCIV’s market capitalization is closer to $6 billion because most financial websites underreport Lucid’s valuation. CCIV shareholders only own a tiny 16.1% slice of Lucid.
Lucid’s low price per share could also be confusing investors — a $20-range price makes it look like early-days Nio or Tesla.
Regardless, Moonshot investors will quickly realize that the number of shares also matters. When an alt-crypto like SafeMoon has 1 trillion coins outstanding, prices going out eight decimal points is the norm.
Don’t be fooled by a low price per share. Lucid is no Moonshot when it comes to repeating Tesla’s 170x return.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.