The world of electric vehicle stocks can be reasonably compared to those markets experienced during the meme mania of 2020-2021. Back then, the Federal Reserve was printing money like there was no tomorrow to spark an economy dealing with the COVID-19 pandemic.
Today, new companies are coming out of the blue almost every quarter. This leaves investors just like yourself with cash to spend. However, you may be confused about which name, if any, is worth even a dime of that hard-earned capital.
Well, that ends today. This article will analyze the best players in the Chinese race for the EV crown. This list is made up of names like NIO (NYSE: NIO), XPeng (NYSE: XPEV), and Warren Buffett's favorite BYD (OTCMKTS: BYDDF).
The outsider always wins
It may seem risky to invest in Chinese stocks. It seems like everyone is repeating soundbites like "China is uninvestable." The general thinking is that anything related to Chinese equities carries an unbearable risk. However, outsiders like Ray Dalio and Warren Buffett, who make the bulk of returns in all their investments by being willing to go against the crowd, are buying into China.
You heard right; Dalio has been buying a broader basket of Chinese equities through the iShares MSCI China ETF (NASDAQ: MCHI). It's reasonable to expect that Dalio expects a swift turnaround in the underlying economic environment of the nation. In other words, a rally like no other.
On the other hand, Buffett has taken his typical approach and buying into direct names. BYD is clearly on his list, overriding the popularity and momentum that names like Tesla (NASDAQ: TSLA) have commanded over the past few years.
So it does pay to be an outsider investor willing to follow the money even if popular opinion condemns it. Today, the same applies to picking the outsider stock in the automotive stock sector, which you can filter out in MarketBeat's stock screener tool.
To save you some time, here are three statistics you should look for:
- The current price as a percentage of 52-week high prices,
- The forward price-to-earnings ratio
- The expected earnings growth for the next twelve months
By spreading these numbers across the sector, a clear winner will present itself to you.
Winner winner, chicken dinner
Starting with the average price action, the sector is trading at 67.8% of its 52-week high prices; it is time to compare this benchmark to these Chinese names. NIO represents the most significant discount, at 46.0%, XPeng comes smack in the middle at 70.0%, while BYD takes the crown for bullish price action at 88.0%.
Now it's time to get the average valuation multiple for the sector in the form of the forward P/E. The industry trades at an average multiple of 5.0x; now, your task is to connect the price action to these valuation multiples, but don't worry, you can just sit back and read along.
NIO and XPeng are trading at negative multiples due to the expectations for negative earnings in the next twelve months. So, it would not be worth your time to justify investing in a company that loses money in a highly competitive industry... Onto BYD!
It makes sense why BYD, unlike NIO and XPeng, carries one of the sector's most vital price action trends. It directly correlates to where markets value this company's next twelve months of earnings. With a 17.6x multiple, BYD sits at a 251.0% premium to the sector's average value.
Now, why would markets be willing to overpay for a name that does pretty much the same as other players in the space? Well, it all comes down to earnings growth and quality perceptions.
While the industry is expected to grow at an average of 7.6% for EPS, BYD analysts are pointing toward 28.6% jumps for the next twelve months; that's nearly four times the industry average!
Not only are numbers looking pretty, but the story behind growth is actually pretty insane. By aligning with Sociedad Quimica y Minera de Chile (NYSE: SQM), BYD is now tied with the world's largest lithium reserve on a partnership basis, which means supplier benefits and expanding margins.
The road is paved for you to win the race, and the vehicle has been selected for you to beat the competition. Will you be an outsider too?
