For about four months, electric vehicle stocks were some of the hottest names in the market. SPAC (special purpose acquisition company) Tuscan Holdings (NASDAQ:THCB) was one of the winners: THCB stock more than doubled on a merger with battery developer Microvast.
But investor sentiment toward SPACs and toward EV plays has changed in an instant. Both groups are seeing immense selling pressure, and now THCB stock is one of the losers. It’s fallen about 43% from highs reached after the merger was made official.
In these kinds of environments, investors need to stay cool and take the long view. That’s precisely the advice I gave a year ago, and the entire market promptly went on a torrid run.
It’s the same advice I’m giving now. Some of these sell-offs made some sense. Some are opportunities. For THCB stock, it’s the latter.
Take a Deep Breath
It’s worth repeating what I wrote last week to subscribers of my Early Stage Investor service:
” … But for tech and growth stocks, it is ugly … and great at the same time.
The hypergrowth stocks we invest in for big long-term gains have been on the move, and they were short-term overbought in the last month. A pullback was warranted, expected, and healthy.
However, the degree of selling in specific stocks is way overdone and makes no sense.
That’s where it’s great. The market is extremely inefficient in the short term, and that causes overdone rallies and sell-offs.”
That sentiment clearly applies to THCB stock. Microvast has a huge opportunity in EV batteries, with the potential for exponential growth in coming years. Yet investors have dumped the stock seemingly as fast as they can.
Now, it’s worth noting that these kinds of moves aren’t all based on inefficiency, or panic. Growth stocks are more volatile because they should be more volatile.
Let’s take a highly simplistic example. Assume you believe a company will grow its earnings 25% annually for a decade. Over that stretch, profits will then rise 831%.
With that kind of growth, you might be willing — or happy — to pay a huge multiple for the stock. You might be happy to own that business before profits even arrive.
Let’s then mark down that growth rate just a bit (seemingly), to 20% a year. Now earnings are growing just 519% over the same period, to about two-thirds the level previously believed.
And so you could reasonably argue that with the modestly lower expected growth, the same stock should be worth roughly one-third less.
The market is constantly doing these types of calculations (albeit with more rigorous analysis). That’s one of the reasons why growth stocks like THCB can move so much, so fast.
Volatility Is Good
Here’s what is really important to remember. For long-term investors, volatility is a good thing.
It can be nerve-racking. As we’re seeing with EV stocks at the moment, it can be downright scary. To see 25% or more of a stock’s paper value disappear in weeks is no fun at all.
But, to be blunt, that’s the price of growth investing. Some investors don’t want to deal with that volatility. Others believe they can — and when faced with a sell-off, wind up buckling and selling at the lows.
And that what creates the opportunity.
After all, Microvast (which is what we’re buying with THCB stock) isn’t worth 46% less than it was a couple of weeks ago. In fact, given a big contract win by one of its partners, I’d argue the company is in better position than previously thought.
Long-term, meanwhile, the opportunity is there. EV adoption is going to rise and thus so will battery demand. Microvast has positioned itself to meet that demand.
That was true in February, when investors were paying $24 per share for THCB stock. It’s true in March, too. The only difference is the stock price.
Playing the Opportunity in THCB Stock
From a short-term standpoint, the sell-off in THCB and other EV names doesn’t have to end immediately. Nor is the sector going to instantly regain past highs.
Again, there were some questionable valuations in the space. In the environment we saw particularly since late October, a pullback was bound to happen.
But a 46% decline here, on basically no bad news, simply seems overwrought. That doesn’t mean THCB is heading back to $24 instantly, or that there won’t be some more bumpy trading along the way.
What it means, rather, is that the cycle is playing out again. Short-term worries have driven an attractive growth stock down. When that happens, it usually creates an opportunity. For THCB stock this time, I don’t believe it will be any different.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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