Last week, the stock market was way more exciting that it needed to be. Two weeks ago, the Federal Reserve met for two days and gave Wall Street what they wanted. They promised to keep loose monetary policy through 2023. Then last week they scheduled 20 speeches, which created complete confusion and the investors temporarily panicked. The price action on Friday felt bearish, but the market closed with a giant buying frenzy. EV stocks were under pressure all week and they too closed well off the lows.
The bulls need to build on that and they do have a tailwind. Let’s consider the facts: First, the Fed is still our friend. Second, the largest stimulus in U.S. history is making its way into the economy. Most larger corporations are doing better than they’ve ever done before. That is certainly true for all the mega-cap stocks. There is hardly a profit-and-loss statement that is in shambles. The exceptions are in the hospitality businesses like cruise companies. But even those stocks are on the rise and recovering.
Some hot segments are starting to cool off, like EV stocks, which are under pressure of late. The electrification of the car is not a fad, so we find stocks that will recover from this malaise. There are hundreds of contenders but only a few winners in the end. The trick is to pick ones that are near support.
Our three today are:
EV Stocks: Tesla (TSLA)
The leader of this EV posse is Tesla and it, too, suffered a lot last week. On Friday alone, the stock failed from $651 per share down to $599. It managed to close a lot higher but the selling was real. Where have all the fans of this company gone? TSLA stock is 30% off its highs and the buyers are not stepping up yet.
I’ve even had a few discussions with technicians that are calling for TSLA stock prices under $400 per share. Unless the entire markets crashes, I completely disagree with that scenario. Even if it happens it would open the door for a phenomenal opportunity. Alone, that stock is not going there. In fact, I can can put my money where my mouth is using the options markets.
To implement my thesis I can sell the September $400 put and collect $25 per contract. And with part of the proceeds I would buy a December $700/$800 debit call spread for about the same cost. This trade is almost cost neutral so there is no money out of pocket now. Each position is bullish on its own. And the worst that can happen is me owning TSLA stock at $400 per share by September. Any proceeds I receive from selling the call spread would be gravy.
In plain simple English I would be making the bet that Tesla will see $700+ prices before $400 this year. The business is healthier than ever and it came out of a disaster. It is a legit car maker with an incredible financial situation. It has set the standard that all other manufacturers are pursuing. This includes giants like General Motor (NYSE:GM) and Ford (NYSE:F). They have all committed to following in its footsteps.
That is an incredible achievement and this is coming from a prior skeptic. Tesla is no longer a struggling company. It generates $5.7 billion from its own operations, which is more than Ford. Shorting the stock based on fundamentals is lunacy and fraught with danger.
Second on my list of EV stocks is Nio. It also took a beating on Friday but has recovered a bit. It’s my second pick because it has the second best opportunity behind Tesla. Nio has the backing of the Chinese government and access to the largest market on the planet. If they build it, people will buy it. It’s as simple as that.
It is only a matter of time before the company improves its financial performance. This switch from internal combustion engines to electrical propulsion and EVs will take time, but it is now inevitable. The ramp will be steep at first but will get easier going forward. There is competition but not from the newcomers.
My contention is that the old dogs will learn new tricks and give Tesla a run for their money. It won’t be the new niche entrants like Lucid Motors that will be filling the EV car needs. Nevertheless, the market is huge so there will be room for all of them to prosper. The current yearly global EV production is about 3 million, which needs to be more than 50 million. Self-driving will also be big, it’s a subset of the new car maker. Tesla is the clear leader there on much of the competition.
My third pick today is definitely not my favorite. I have to leave room for a long shot and that’s Fisker’s EV attempt. Even though I remain a skeptic, I thought it had big upside potential in January. I noted that back then that $17.60 was an important catalyst. It delivered and then some. On Friday, FSR stock closed at $17.61. Clearly it still matters. Usually when they revisit the neckline of a breakout it’s support.
The company promises to deliver relatively cheap cars under the Ocean label. Henrik Fisker failed in his prior attempts at creating an electric vehicle. But this time it’s different because Tesla kicked the door down for him. The environment is riper now for new things in the car markets. Presenting new ideas is no longer that crazy after what Elon Musk did.
Fisker also has better financing thanks to the wave of SPACs. They have almost a billion in cash. This makes executing on their goals less problematic. The designs look great, but management needs to start delivering on milestones. Therein lies the bet on FSR stock. Wall Street interest rises once they have concrete dates. Investors are good at foresight and hope, but they are even better when they see tangible outcomes. It’s one thing to promise out-years delivery targets, and it’s another to actually have a release date on the docket.
Defining the Type of Trade Is Important
In the order of preference, I would take TSLA first, NIO second and FSR third. I would also segment them into two different categories. Tesla and Nio are investments whereas the FSR trade would be speculative. If price goes against me, I would be willing to adjust the size of an investment. Whereas with Fisker, I set the risk amount firmly in place. I do not add to it.
The whole market feels heavy but mostly because of sentiment. The macroeconomic conditions have not changed in a while. Yet pundits insist on conjuring up what-if scenarios of doom. At some point, they’re going to have to stop fighting to Fed, and stop fighting the tape. Just ride this bullish market even longer. It has been a while, but it’s been one special situation after another.
Bringing up old stats is useless because they don’t apply. We have never had these conditions ever before. Therefore, using prior results to forecast future events is ridiculous. Until the facts change, I will stick to my strategy today.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.