Key points
- Two titles will play an undeniably important role in the electric vehicle race in the coming years, regardless of who wins.
- Speculation, and the biggest reward, could come from projecting who the real winner will be: Tesla vs BYD.
- Fundamental cycles are about to change direction and this time the Fed is ready to help by giving investors the necessary timing.
- 5 stocks we like best from BHP Group
One of the few significant trends driving investor interest – and Wall Street – today is the race for electric vehicle (EV) dominance. Like technology stocks in their rush to discover artificial intelligence (AI), investors must be extremely choosy about which names to back and why.
While it may be a long shot as to which company might win the race, a trend is as clear as shooting fish in a barrel. Let it be Tesla Inc. NASDAQ:TSLA OR BYD Company Ltd. OTCMKTS: BYDDF which takes the majority of the EV market share, both would need the help of two key components to reach the top.
Copper and lithium are key materials in making the batteries to run these electric vehicles, where two mining stocks come into play as indispensable. BHP Group Ltd. New York Stock Exchange: BHP AND Chemical and Mining Society of Chile NYSE: MQ they could be the crutches that Wall Street and investors are calling on to truly ride the electric vehicle wave to its completion.
A hiccup on the road
The price action did not favor any of these stocks; as a group, they trade on average at 70% of their 52-week high prices. Wall Street’s definition of a bear market is a 20% or more retracement from recent (or historical) highs, opening the fundamental pillar for investors to consider a cyclical value play in this space.
Between 2021 and the end of 2022, lithium prices climbed to decade highs. At the same time, copper reached levels not seen since 2011. This was the result of a demand boom fueled by looser monetary policy in the United States. Immediately afterwards the markets got scared and decided to abandon these potentially overpriced securities.
After the markets came to their senses, these companies lost more than 50% on average, reflecting the uncertain nature of the future potential of electric vehicles. However, history may repeat itself now that US consumer confidence is at a 2021 high and the Federal Reserve (Fed) is proposing up to 3 interest rate cuts in 2024.
Cheaper financing rates could help revive demand for electric vehicles this year, as is needed after Tesla reported lower-than-expected delivery demand. The stock is now trading at a dismal 58% of its 52-week high, and analysts are at the 58% mark. The Goldman Sachs Group Inc. they had no shame in reducing their price targets from $190 per share to $175.
At the same time, lower demand for electric vehicles has pushed copper and lithium prices to cyclical lows. This effect can be seen in Sociedad Quimica’s decline to 2021 levels, and BHP Group’s current share price target of $50 calls for a downside of up to 16% in the stock.
The fund starts with suppliers
Analysts may soon need to update their earnings per share (EPS) projections for BHP Group. Management currently expects an EPS decline of 11% for the next 12 months and believes these predictions are far from the truth.
Paying investors a 4.8% annual dividend is not easy, as these payments must be financed through free cash flow (operating cash flow minus capital expenditures) and without predictable and reliable profits, there is no flow of free cash.
BHP’s copper is out of the spotlight in the electric vehicle sector, but it is still a key component to keep an eye on. Since the stock is among the low beta stocks, investors could rely on minimal price action and a steady dividend to get them through the winter.
However, lithium represents a more popular bet for those looking to grow their wealth at a potentially faster pace. Sociedad Quimica’s high beta could help its stock price reach the consensus price target of $66 per share set by analysts today.
With expected EPS growth of 37.6% this year, the company is set to beat the Mining sector’s expected 8.6% growth. The stock’s 7.3x P/E valuation falls below the Specialty Chemicals sector’s 308x P/E, a huge discount despite it being set to grow at above-average rates.
A tale of two cities: Tesla and BYD
BYD’s underdog narrative has helped it stay under the radar, quietly surpassing Tesla in global EV sales. Because this company has reached a more diverse customer base (in terms of geography), it can cushion the inevitable swings in consumer trends and sentiment that could affect EV sales trends.
No matter BYD’s reach, one thing remains true: It’s a Chinese stock. Chinese stocks have suffered some of the worst in recent years, with blue-chip stocks such as Alibaba Group struggling to get out and regain investor confidence. For this reason, Tesla’s decline may seem much more attractive to investors.
While BHP and Sociedad Quimica’s position in the electric vehicle race is undeniable, the third component – the potential winner – will require scrutiny from investors when considering Tesla versus BYD.
Before you consider BHP Group, you’ll want to hear this.
MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and BHP Group wasn’t on the list.
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