Beware! Not Every EV Stock Will Be a Tesla

May 13, 2021

  • "The markets can remain irrational longer than you can remain solvent. So be cautious and flexible as market conditions evolve." - John Maynard Keynes

This quote is one of the most widely used statements in equity markets. It points towards excesses both on the upside and downside.

Here's a good example...

With the sharp rise in covid cases during the 2 wave, the demand for oxygen surged in April last month.

This has prompted investors to search for companies which were in anyway related to the word 'Oxygen'.

Let's look at two of these stocks.

Linde India is one of the largest manufacturers and supplier of liquified oxygen.

Its sales are expected to show massive jump which has led to an 85% rise in its stock price over the past 3 months.

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Now to some extent, I partially agree with the the logic of investing in Linde India for short term gains.

But this frenzy in the stock price is not sustainable over the long term unless the market is assuming the shortage of oxygen cylinders continues in the long term.

In my view, with the vaccine roll out, that's highly unlikely.

Now let me draw your attention to irrationality of the highest order: Bombay Oxygen Investments Limited

Stock Price on 25 March 2021: Rs 10,000

Stock Price on 19 April 2021: Rs 24,500

That's 2.5x in 25 days.

But the most important fact is this...

Bombay Oxygen Investments limited has nothing to do with Oxygen.

The company's primary business is manufacturing and supplying of industrial gases which has been discontinued from 1 August 2019.

The company owns substantial financial investments in the form of shares, mutual funds, and other financial securities.

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The income from such financial investments is the source of revenue of the company, as per the company's website.

Such is the frenzy in the stock market at the moment.

Now there is nothing new about irrationality or obsession with particular names or fads in the stock market.

If you recall, the same madness was prevalent during 2013-14 and 2016-17. In 2014-15, the buzz word was 'solar'. In 2016-17, the mad obsession was with the word 'electric'.

In 2014, when Narendra Modi was elected with a huge majority, the theme was renewable/solar energy.

In his election campaign he had stressed the need for India's increasing adoption of renewable energy and lower dependence on fossil fuels.

The story looked exciting back then.

Any and every stock which was connected to the word solar or had anything remotely to do with renewables multiplied by 3-5x in a year.

Moser Bear which used to manufacture CDs and pen drives, changed its business model to manufacture solar modules and solar cells.

The stock went up 5x in less than 2 years.

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However, during that period, its financials deteriorated rapidly. The company's net loss increased from Rs 3.9 bn in 2010 to Rs 9.4 bn in 2014.

The massive loss wiped out its reserves and eroded its entire book value.

Amid all this, the market was gung-ho about the renewable story. Most people didn't understand the stock rally lacked fundamentals.

Chinese solar panels were dumped into India at much lower cost. Also, there was no major policy support back then, apart from 5 year and 10 years renewable targets. The cost structure was unviable.

Eventually, due to the poor earnings the company declared bankruptcy. Retail investors caught in the loop lost all their money.

Let us take a step further in to this frenzy.

The rush for solar stocks got so crazy, that a friend called me and asked me to buy the stock of Solar Industries.

Now, Solar Industries is a manufacturer of explosives which are used in mines. It has absolutely nothing to so with solar energy or renewables.

The same madness happened in 2016-17. The buzz word was 'electric'.

A company by the name of Eon Electric was a sought after name among retail investors.

The funny part is, stories about the company planning to foray in electric chargers for vehicles was doing the round.

In reality the company makes electric chargers for mobile phones and not vehicles.

Not to forget the stock made a high of Rs 120 in 2017 (3X in a year) before the price crashed to single digits currently.

Now I do acknowledge electric mobility is the future. Investors identifying trends in the EV space along with companies in the EV supply chain will make astronomical returns over the long term.

But not every investment will work.

In this euphoria, it's imperative to find quality small cap companies which have strong sustainable earnings potential and are not merely the so called fad stocks.

Recently, major two wheeler companies announced forays into electric vehicles. The space is buzzing with news.

We at Equitymaster have identified good companies which will benefit from the shift to EVs.

These include manufacturers, the supply chain for electric vehicles (i.e. battery and battery components) along with companies in the charging infrastructure space.

Watch this space...

Warm regards,

Aditya Vora
Aditya Vora
Financial Writer

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