Monday started with a bang for Tesla (NASDAQ:TSLA) stock. It rallied almost 4% while the rest of the sector struggled. Plug Power (NASDAQ:PLUG) was down more than 8%. Nio (NYSE:NIO) and XPeng (NYSE:XPEV) were down -3% and -1.5% respectively. Today we evaluate if this is an opportunity to get into XPEV stock or not. It has fallen into a prior pivot zone, which usually lend support.
The first variable to address is the time frame.
Investors with a really long horizons do not need to worry about surgical entry points. The stock is low enough for it to make for a decent long-term bet. Unlike those who panicked bought in November, now it’s not an obvious bloat.
Still, I would not take a full size position just because of extrinsic factors. The stock markets are near all-time highs, which makes them vulnerable to dips. XPEV stock needs to trade inside these indices. If they fall, they will drag it in sympathy to no fault of its own.
Management Is Doing Its Job Well
For those who prefer timing entries, there are clues and logic to help guide us. There is some good news from the fundamentals. The income statement is growing fast, and so are the profit margins. Management is growing assets faster than debts. They are still bleeding cash but not at an alarming rate. It’s a good scorecard so far.
The world is embracing the change over from fossil fuel vehicles to electric vehicles. XPeng’s total revenues in first quarter of 2020 were only $60 million. Last quarter, they were $430 million. That’s a sizeable increase, especially in a pandemic year. When the team is delivering growth this quickly there is no need to nitpick valuations. Even then, XPEV price-to-sales is under 30.
While this is not cheap, it is definitely acceptable. The sales rate growth could bring that metric in line fairly quickly. You can’t deliver explosive growth on a budget – just ask Amazon (NASDAQ:AMZN). The first conclusion is that fundamentally there’s no need to panic out of shares now.
XPEV Stock Has Technical Support
The next piece of the puzzle lies in the technicals. Yes, they do matter – especially for the short term. Machines are doing most of the trading and they only use technicals to trade. Ignoring that facet means putting on blinders on the bulk of the price drivers.
The recent action in XPEV stock shows support at or below $31 per share. There’s even stronger support going into $25 per share. These are levels that have been pivotal since the beginning. My expectation is that they will hold regardless of short-term dips and fears.
The electric vehicle wave has many frothy companies, this is not one of them. They actually have a healthy P&L and it’s improving. My order of choice is Tesla first, Nio and XPEV are close seconds. I reiterate what I’ve mentioned before that it moves fast, so moderation is good.
Think Outside the Buy-and-Hold Box
Using the options markets, investors can get long the stock and leave plenty of room for error. Instead of buying XPEV shares with no room to spare, I can sell puts. This leaves me a healthy buffer just in case. Specifically, an investor can sell the July $30 XPEV put and collect $3 per contract.
If the stock stays above $30 then they would have created income out of thin air. This would be the equivalent of a 9% rally without any out-of-pocket expense. If the stock collapses, then they can break even at $27 per share. Someone who bought the shares outright in such a scenario would be already down 20%. Selling puts works as long as the investor is honest about wanting to own shares. Otherwise, it could create some complications.
I like blending many strategies. For example, selling the put could be stage one, and adding XPEV shares or leap calls would be stage two. This allows investors to participate in the upside with much smaller out-of-pocket now.
The stock markets have gone far beyond the reasonable. Although it’s not a reason to short them, it does encourage caution. Going all in, especially when someone is already long stocks, is reckless. Owning too many of the same sector stocks is also dangerous. If I’m long Tesla and I have profits, I should close them before getting long this one. Balance is the best weapon on bad days for investors.
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.
