Electric vehicles have been popular on Wall Street for months. The king of the EV herd is, of course, Tesla (NASDAQ:TSLA). It did all the hard work to pave the way for hundreds to follow. Since the pandemic, we’ve had a slew of SPAC (special purpose acquisition company) IPOs chasing the EV dream. But if TSLA stock is down 40% then hopefuls like Tuscan Holdings (NASDAQ:THCB) are also in trouble. THCB stock currently sits around 50% below its February highs.
Sadly, the fundamentals are lacking, so when sellers show up, they have an easy job.
The allure of the EV space is its upside potential. The potential problem is looking at every opportunity from the Tesla success prism. It took many miracles and one Elon Musk to come out with a win. About a year ago the company was near death and experts were already sizing it up for a coffin. Now it has an excellent financial position and a very healthy pipeline.
Overall the electrification of the car market is going to be massive as the world converts vehicles from fossil fuels to electrons.
My contention is that it will be the legacy makers that deliver the bulk. But there will be high demand for peripheral industries, including the one that Tuscan is pursuing. Battery and recharging technologies are critical to the success of the EV experiment.
THCB Stock Is In the Right Industry
All the major manufacturers have committed to an EV future. They will need a lot of batteries and services to support them. This plays right into the hands of TCHB stock.
As evident from the stock price, it doesn’t mean a slam-dunk success story. I usually avoid chasing mega rallies, because of the risk of being late. Imagine buying THCB over $24 per share. A month later half the investment is gone.
Conversely, patient investors who wished they owned it on the way up can now try it. Doing so after the mania dies down leaves smaller room for errors.
The market capitalization is now a fraction of what the merger valuation originally implied. A large amount of froth has already left the stock so new buyers are getting a relative bargain. This doesn’t mean that it’s a conviction buy situation either. Far from it, because buyer beware and do the homework. Not everything electric is going to succeed especially from the stock perspective.
The Venture Remains As Speculative As Ever
I am not one to shy away from catching falling knives. The problem with doing so for THCB stock is the lack of fundamentals. The excitement around owning these SPACS lies completely in their future successes. There are no current metrics to use for defense. When Tesla stock comes under fire, we can calculate where it would be a good deal. This is not the case for Tuscan holdings.
Maybe it could get a battery order from Oshkosh (NYSE:OSK), or maybe not. But the U.S.P.S may take the entire OSK delivery as fossil vehicles only. This, to me, sounds more gambling than investing with an edge. There is a place for speculative stocks in most portfolios. THCB can make for an investment thesis there but with appropriate size. And if the going gets even tougher I wouldn’t add to the risk. Tuscan’s partnership with Microvast is promising, but so are dozens more. Most won’t make it, so investors need to have realistic expectations.
It’s also important to note that there is overall risk. The stock markets are near all-time highs in spite of challenging conditions. This week the Federal Reserve gave investors what they wanted and it wasn’t enough. Even though chairman Jerome Powell promised no rate hikes through 2023, investors were not happy. It wouldn’t take too much to cause more severe downside. If that happens, there’s no telling where to floor lies in frothy stocks like this one. I prefer to bet on proven winners how have tangible results already.
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.