Of the few significant trends driving investor—and Wall Street—interest today is the race for electric vehicle (E.V.) domination. Like technology stocks in their own race for artificial intelligence (AI) breakthroughs, investors need to be extra picky about which names to back and why.
While it can be a wild guess as to which company could win the race, one trend is as clear as shooting fish in a barrel. Whether it is Tesla Inc. (NASDAQ: TSLA) or BYD Company Ltd. (OTCMKTS: BYDDF) that takes over most of the EV market share, both would need the help of two critical components to rise to the top.
Copper and lithium are fundamental materials in making batteries to make these EVs work, where two mining stocks come into play as indispensable. BHP Group Ltd. (NYSE: BHP) and Sociedad Quimica y Minera de Chile (NYSE: SQM) may be the crutches that Wall Street and investors call upon to really ride the EV wave to its completion.
A Hiccup in the Road
Price action hasn’t favored any of these stocks; as a group, they trade at an average of 70% of their 52-week high prices. Wall Street’s bear market definition is a 20% or more retracement from recent (or all-time) highs, opening the foundational pillar for investors to consider a cyclical value play in the space.
Between 2021 and late 2022, lithium prices rose to a decade-high. At the same time, copper reached levels not seen since 2011. This was the result of a demand boom fueled by easier monetary policy in the United States. Markets were spooked right after and decided to ditch these potentially overpriced stocks.
After markets returned to their senses, these companies declined by more than 50% on average, reflecting the doubtful nature of the EV’s potential future. However, history may repeat itself now that U.S. consumer sentiment is at a 2021 high, and the Federal Reserve (the Fed) is proposing up to 3 interest rate cuts in 2024.
Cheaper financing rates could help revive demand for EVs this year, as is the needed case after Tesla reported delivery demand below expectations. The stock is now trading at a dismal 58% of its 52-week high, and analysts at The Goldman Sachs Group Inc. had no shame in slashing their price targets from $190 a share down to $175.
At the same time, lower EV demand dropped 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 $50 a share price target calls for up to 16% downside in the stock.
The Bottom 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 an annual 4.8% dividend is not easy, as these payouts need to be financed through free cash flow (operating cash flow minus capital expenditures), and without predictable—and reliable—profits, there is no free cash flow.
BHP’s copper is far from the spotlight in the EV sphere, but it is still a key component to watch. Because the stock is part of low beta stocks, investors could rely on minimal price action and a steady dividend to get them through the winter.
However, lithium presents a more mainstream bet for those looking to grow their wealth at a potentially quicker rate. Sociedad Quimica’s high beta could help its stock price reach the consensus price target of $66 a share set today by analysts.
With projected EPS growth of 37.6% this year, the company is set to beat the mining industry’s expected 8.6% growth. The stock’s 7.3x P/E valuation falls below the specialty chemicals industry’s 308x P/E, a massive discount despite being set to grow at above-average rates.
The Tale of Two Cities: Tesla and BYD
BYD’s underdog narrative has helped it stay under the radar while quietly surpassing Tesla in global EV sales. Because this company has reached a more diversified customer base (in terms of geography), it can cushion the inevitable swings in consumer trends and sentiment that may hit EV sales trends.
No matter BYD’s reach, one thing stays true: It is a Chinese stock. Chinese stocks have suffered from the worst of reps in the past few years, with blue-chip names like Alibaba Group struggling to break out and regain investor confidence. Because of that, Tesla’s dip may look a lot more attractive to investors.
While BHP and Sociedad Quimica’s position in the EV race is undeniable, the third component – the potential winner – will require investor scrutiny in considering Tesla versus BYD.