Albemarle & Aptiv: Why EV Supplier Stocks Are Poised To Beat The Market
Our indicative theme of Electric Vehicle Component Supplier Stocks – which includes stocks of companies that make EV components and raw materials for batteries – has outperformed rising by 8.3% year-to-date, versus 3.6% for the S&P 500. The theme has also returned about 45% since the end of 2019, compared to a return of about 20% on the S&P 500. Within our theme, auto parts major Aptiv has been the strongest performer this year, rising by over 16% since early January, driven by stronger than expected quarterly earnings, while Amphenol Corporation, a company that makes electrical and fiber-optic connectors, has underperformed, declining by about -2% year-to-date.
So will the theme continue to outperform in the near-to-medium term? Yes, we think so for a couple of reasons. Firstly, regulations under the Biden Administration are likely to be favorable for green technologies including renewable energy and electric vehicles. Secondly, mainstream automakers are making bigger commitments to electrification, and this should drive up demand for EV suppliers. For example, in late January, General Motors GM – the largest U.S. automaker – announced that it would launch 30 electric models by 2025, with plans to sell only EVs by 2035. There are other market-specific factors that could help EV supplier stocks as well. With Covid-19 vaccines being rolled out, investors are hoping for a quicker economic rebound, moving money away from technology names that rallied big through the pandemic to more real-economy sectors including auto components and mining stocks. This could also help the companies in our theme.
Our indicative theme of Electric Vehicle Component Supplier Stocks – which includes stocks of companies that make EV components and raw materials for batteries – has fared quite well in recent weeks. Year-to-date gains for the theme are now up to 35%, versus the S&P 500 which is up by about 15% over the same period. While the recent gains are driven partly by the optimism surrounding the Covid-19 vaccines, investors are also likely looking at suppliers as a good way to play the rapidly expanding EV market without having to bet on pricey EV manufacturer stocks such as Tesla TSLA (up 7x this year) and Nio (up over 10x). Within our theme, Albemarle – the largest producer of lithium for EV batteries – has been the strongest performer, doubling year to date. The stock has rallied by over 60% over the last two months alone driven by an earnings beat and better than expected performance of its lithium business. On the other side, BorgWarner, a company best known for its transmission systems, has seen its stock decline almost -10% year-to-date, partly due to its exposure to mainstream automakers.
[Updated 10/19/2020] Why Suppliers Might Be A Better Way to Play The Electric Vehicle Market
Investing in the fast-growing electric vehicle market looks tricky at the moment. Pure-play EV stocks have rallied big this year and look overvalued. For instance, Tesla is up 5x this year, while China’s Nio is up over 7x. On the other hand, mainstream automakers who have been slowly transitioning to electric drivetrains could face financial challenges due to the disruption caused by Covid-19. Our indicative theme of Electric Vehicle Component Supplier Stocks – which includes stocks of companies that make EV components and raw materials for batteries – could be a good way to play the growing electric vehicle market, without having to bet on individual brands. The theme is up by about 9% year-to-date, versus the S&P 500 which is up by about 8% over the same period. While Albemarle is the strongest performer in the theme, up by about 30%, BorgWarner BWA stock is down by about -10%. Below, is a bit more about these companies and how they’ve fared so far this year.
Albemarle is the world’s largest producer of lithium for EV batteries. Most electric vehicles are powered by lithium-based batteries and it’s likely that demand for the material will rise as EV adoption grows. The stock is up by about 30% year-to-date.
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TE Connectivity provides a range of products including connector systems, sensors, and relays for a range of industries such as automotive, aerospace, defense, and oil and gas. The company has increasingly been focusing on products for hybrid and electric vehicles. The stock is up by about 14% year-to-date.
Amphenol Corporation sells a range of components used in EVs including charging inlets, charge plugs, various sensors, and power distribution systems. The stock is up by about 7% year-to-date.
Aptiv provides a range of solutions for the auto industry, including autonomous driving technologies, safety technologies, components, and wiring. The stock is up 4% this year.
BorgWarner is an auto components and parts supplier best known for its manual and automatic transmissions. The company is doubling down on the EV space, producing electric motors, power transmission, and power electronics for electric vehicles. The stock is down -9.5% this year.
What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 120% return since 2016, versus 60% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.
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