Electric vehicle (EV) stocks are popular right now. Just look at Trading 212’s Hotlist, which shows the most-owned shares on the platform. Currently, that’s EV powerhouse Tesla. The third is China’s NIO.
I don’t own any EV stocks and I don’t plan to buy any for my portfolio in 2021. Below, I’ll explain why. I’ll also explain where I’m investing instead.
Why EV stocks are popular
I can see why investors are attracted to EV stocks. For starters, the industry’s booming right now. Last year, global EV sales grew 43% to 3.2m, despite the fact that overall vehicle sales fell by 16%.
Secondly, the EV industry has very strong long-term growth prospects. At the end of 2020, there were only around 10m electric vehicles on the road globally. By 2030, this figure could rise to 230m, according to the International Energy Agency (IEA).
Third, EV stocks offer a good way of investing sustainably. Interest in sustainable investing has skyrocketed in recent years.
Why I’m not buying EV stocks
So, why don’t I own any EV stocks? Well, one reason is that valuations across the sector are very high at the moment. Take Tesla, for example. It currently has a market-cap of $600bn. That’s over 10 times the market-cap of Ford. Some small players have market capitalisations in the billions despite the fact they’re not even producing any vehicles.
As a result of the high valuations across the sector, short sellers are targeting EV stocks (meaning they expect them to fall). Many of the smaller players currently have very high levels of short interest. Lordstown Motors, for example, currently has short interest of 48%. Nikola, meanwhile, has short interest of 42%. This is a red flag, in my view.
Another reason I’m avoiding EV stocks is that competition in this industry is intense. Recently, 18 out of the world’s top 20 vehicle manufacturers have announced plans to rapidly scale up production of electric vehicles. Right now, we don’t know who the long-term winners in this industry will be.
A third concern is that, traditionally, automakers haven’t made a high return on capital. Ford, for example, has generated an average return on capital employed (ROCE) of just 1.1% over the last five years. For General Motors, Volkswagen, and BMW, the figures are 4%, 3.5%, and 3.4% respectively. Over the long-term, companies that generate a low return on capital tend to be poor investments.
Where I’m investing in 2021
In my opinion, there are a number of other growth industries that offer a superior investment risk/reward proposition than the EV industry.
One is cloud computing. Over the next decade, this industry is projected to grow at nearly 20% per year. Stocks I own for exposure include Amazon, Microsoft, Alphabet, and Okta.
Another theme I like is digital payments. Over the next decade, trillions of transactions are set to shift from cash to cards and e-payments. Stocks I own here include Mastercard, Visa, and PayPal.
There are risks associated with these kinds of stocks too, of course. However, overall, I feel that they’re a better long-term bet than EV stocks.