During the various gold rushes around the world during the 19th century, it was almost impossible to pick winners among the hundreds of thousands of prospectors who swarmed to places where gold was discovered, but one thing was for sure: Whoever struck the mother lode, or even if nobody did, whoever sold them picks and shovels made money. That is why the strategy of investing in suppliers to a booming industry is often referred to as a “picks and shovels” approach, and in what looks like being a pivotal year for electric vehicle (EV) manufacturers, it may be a wise one for investors in that space to adopt.
Just before trading for 2022 began this week, Tesla (TSLA) announced that they had beaten even their own challenging targets and delivered over 308,000 vehicles in the last quarter of 2021. That is an impressive feat given supply chain constraints, but Tesla’s success in churning out cars highlights the challenge facing the rest of the EV industry this year: turning potential into production. Tesla has already shown they can do that; other, younger companies in the space will be shifting gears this year from designing to manufacturing. In that respect, 2022 will be the year of the EV.
The problem for investors is that it is hard to know how well management teams at the smaller EV start-ups will be able to execute plans to actually produce vehicles. Ultimately it will be that, not where companies like Amazon (AMZN) or Walmart (WMT) places its next order for trucks, that decides the fate of most of these companies. It looks like there will be enough demand all around to give everyone a chance, but can they meet that demand?
After the recent selloff, you can make a strong case for stocks like Rivian (RIVN) and Lucid (LCID) at these levels, as well as a couple of the smaller, riskier plays in the field. Even then, there is still some speculation involved as to how well the companies will manage shifting to production in an environment with persistent supply chain challenges.
Given that, while I will no doubt be looking at several EV stocks as the year progresses but, outside of TSLA, the best base position in the industry for this year may be in suppliers rather than manufacturers. That way, whichever companies succeed in shifting to manufacturing, you win. That brings in lithium miners and suppliers such as Albermarle (ALB), Livent (LTHM), and Lithium Americas (LAC), as well as parts suppliers such as Aptiv PLC (APTV).
You might expect given that the potential of the EV market is hardly a well-kept secret, that value among those suppliers would be long gone. In most cases you would be right. There is, however, one of the names mentioned that shows real value based on one important metric, even though its chart doesn’t scream “BUY!” and that name is APTV, with a PEG ratio of 1.0. The PEG ratio shows the relationship between actual earnings and projected growth, and a reading at or below 1 is generally considered to show that a stock is cheap relative to expectations.
Given the massive shift that is coming during this year for a number of EV companies, away from concepts and designs to output and hopefully sales, it could even be that those expectations are low. If that is the case, then there is enormous upside to APTV this year. Even if not, the stock still looks like decent value with a limited downside. So, until the EV winners and losers sort themselves out, I will stay invested in the suppliers, with APTV as a top pick.
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