Is the Math Still Profitable for Plug Power?

In my discussion regarding Plug Power (NASDAQ:PLUG) in early October, I mentioned that the mathematical relationship between PLUG stock and shares of electric vehicle giant Tesla (NASDAQ:TSLA) was still very much intact.

3d render image of hydrogen energy fuel cell from Plug Power
Source: Shutterstock

By that, I meant that two stocks shared an incredibly strong correlation coefficient. As TSLA found its way close to the moon, so too did Plug Power.

For multiple reasons, the relationship appeals to investors of alternative energy solutions companies.

A Matter of Psychology

Primarily, a psychological factor is in play. As you know, TSLA trades at around $400. That’s despite TSLA’s 5-1 split that made each unit “cheaper.” While that has allowed prospective buyers an easier road to acquiring full unit ownership as opposed to fractional ownership, $400 is psychologically a much larger hill to climb than $16.34, which is a recent price of PLUG stock.

Second, even ardent Tesla bulls must figure that they risk some significant correction ahead, perhaps more severe than the broader EV correction that we’ve seen recently. While EVs have become much more mainstream than ever before, notes that on a global scale, only one in 250 cars is electric. Thus, you don’t want to buy into TSLA thinking that you’re immune from potential downside.

But with PLUG stock, the narrative of the perpetual bull is presently much more acceptable. Although shares have enjoyed a meteoric performance this year, the underlying organization has long disappointed stakeholders. Therefore, you can make the argument that the technological paradigm is just now robust enough to make Plug Power feasible.

However, it’s unusual for two companies on somewhat opposite ends of the spectrum – Tesla as the established EV leader and Plug Power as the bumbling upstart that’s finally bringing its alternative energy solution to the forefront – to track each other indefinitely.

Naturally, investors want to know, does the relationship still hold a little more than one month later?

Tesla Might Be Pinging a Warning for PLUG Stock

Perhaps the answer to the above question won’t be satisfying, which is maybe.

PLUG stock vs. TSLA stock (Nov 2020)
Click to Enlarge
Source: Chart by Josh Enomoto

In the year-to-date through Nov. 2, PLUG stock and TSLA still share a strong correlation coefficient at 96%. But over the last several weeks, the relationship hasn’t tracked as well as before. Between Sept. 24 through Nov. 2, the correlation coefficient dropped to 59%.

To be clear, a 59% correlation strength is still robust enough to indicate a mathematically significant relationship, as you can see for yourself by eyeballing the above chart. However, the change in strength of relationship (the delta for all the folks that love business-speak) is also significant.

An Explanation

So, what explains the almost rude transition from 96% to 59%? For Tesla, it’s a bit easier to answer. As you know, the economic recovery from the impact of the novel coronavirus has not been enjoyed equally. In many ways, the pandemic has been beneficial for the well-to-do (no commuting, for example). Thus, these folks have upgraded to luxury brands in their automotive purchases, as the Wall Street Journal explained.

But with the contentious 2020 election along with the possibly prolonged social unrest, discretionary retail demand might decline. As well, soaring coronavirus infections have spooked traders, causing them to dump out of retail-exposed positions. Therefore, TSLA along with other EV plays weakened, including PLUG stock.

What has made investors more confident in Plug Power, though, is that the period between Sept. 24 and Oct. 7 has been phenomenal. Over the same time frame, TSLA was largely loafing around. Thus, it seems like PLUG can continue plugging ahead.

However, the company is also levered to the discretionary retail market through its e-mobility solutions. That’s why you may not want to get too comfortable with PLUG stock.

At Day’s End, It’s a Tricky Narrative

Still, before I get inundated with hate mail, it’s important to point out that e-mobility does give Plug Power some insulation from the headwinds impacting EVs and alternative-fuel vehicles in general. With e-commerce receiving a sensational lift due to the new normal, PLUG stock can still theoretically ride this momentum.

Put a gun to my head (as I’m sure some of you want to do) and I’ll say that the technical picture for PLUG doesn’t appear as damaged as Tesla’s. On that, I think investors can take a cue and buy some of this discount.

Nevertheless, I can’t emphasize this enough: you should keep the powder keg dry. While I wouldn’t recommend shorting PLUG, the next few weeks will be fraught with tension. Thus, this may not be the only discount to advantage.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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