From EVS to SPACS
THESE ARE THE HOT INVESTING SECTORS WHERE VALUATIONS ARE GETTING STRETCHED
Sometimes, especially when markets are running, investors forget the basics. you know, those things such as sales, earnings, cash flow, margins and valuations. When stocks are moving, and sectors are ‘hot,’ investors will often just buy into momentum. Now, we love momentum, but we love it more when it is actually backed by strong fundamentals. It is always dangerous to just buy a stock just because it is moving, without first examining the reasons behind the move.
Let’s take a look at five hot sectors and some companies within them. In most cases, we think investors need to do some serious due diligence before jumping in.
Electric vehicles and all things connected to them
With the stunning twoyear run of Tesla, every investor, it seems, is looking for the next Tesla. battery companies, storage companies, lithium companies — they are all running hard these days. but most, such as Workhorse Group (WKHS on Nasdaq) have essentially no revenue yet. Investors need to know what they are buying.
In many cases, sales growth comes as planned, but companies have a hard time scaling up production profitably. Workhorse, up 1,100 per cent in the past year, has a market cap of us$4.8 billion. There are literally dozens and dozens of companies in this space: they won’t all be the next Tesla.
Special Purpose Acquisition
Companies (SPACS)
A SPAC is a company that raises money first, and then decides what to do with the cash. Typically, a SPAC must find a company to buy within two years, or investors get their money back (minus fees). It was an exceptionally hot space in 2020, and doesn’t really show any signs of slowing down. We can’t go a day without hearing about another hot SPAC, and of course the companies the SPACS end up buying are often in one of the other hyped sectors that we are discussing today. A SPAC that ends up buying an electric vehicle company is about the hottest thing going these days. Case in point: Arclight Clean Transition Corp. (ACTC on Nasdaq), a SPAC merging with Proterra, a maker of commercial electric vehicles. 2021 year to date return: 131 per cent. We will give some credit where it’s due here because at least Proterra has revenue (close to $200 million last year), but be careful — just because it is a SPAC doesn’t mean it is a sure bet, even though that is certainly how investors are acting these days.
Renewable and alternative energy
In an earlier column this year we discussed renewable energy as a 2021 theme.
This may be a case where the hype is at least backed up by real-world events. Consumers, governments and investors will pay more for green energy, and carbon-based energy companies continue to have bleak long-term prospects, despite a recent uptick in oil prices. renewable companies conversely get very high market valuations, and thus their cost of capital can be lower than other companies. This lower cost of capital can set up a positive feedback loop for future growth. Plug Power (PLUG on Nasdaq) is perhaps the poster child of this sector. The stock is up 105 per cent this year, even though it raised money in January. Getting a us$1.5 billion investment from Korean firm SK Group certainly helped the stock performance. The stock, now at us$70, was barely us$1 a share less than four years ago.
ESG companies
ESG stands for environmental, social and corporate governance. The theme here is that good, socially-conscious companies are better investments. To highlight this hyped sector, let’s take a look at Facedrive Inc. (Fd on TSX-V). This week, the company has a market cap of $4 billion. It bills itself as a “people and planet” first company, and is involved in various business such as ride sharing, food delivery and COVID tracing. but remember fundamentals? In its last reported quarter (Sept. 30, 2020) Facedrive reported $266,460 in total revenue. The company trades at an astronomical price-to-sales valuation, even in this frothy market. Now, we do not follow the company at all, so are just commenting on the valuation. Interesting, despite the large market cap, no bay Street analysts follow the company, either. There are numerous ESG companies and funds popping up everywhere these days. but, as usual, just slapping a label on a company does not automatically make it a good investment.
Psychedelic drugs
The sector is hot, so of course there was an ETF quickly launched recently to capture investor interest. Horizons Psychedelic Stock Index ETF was launched last week (symbol PSYK). The sector hype is also exemplified by the market capitalization of Mind Medicine (Mindmed) Inc. (Mmed on the NEO exchange). Mmed has a market cap of us$1.1 billion. Most recent quarterly revenue? Zero dollars. Net loss in the last three months? $8.6 million. Now, the cannabis sector was exceptionally hot when it first launched, then we had a flame out, and now a recovery. Our bet is the same thing happens with psychedelics. yes, there is a market opportunity here. but we are highly doubtful it will be as big as companies and investors expect it will be. We might see some pain in this sector later in 2021. Caution is advised, and we would let the hype die down and the consolidation of companies begin.
Financial Post Peter Hodson, CFA, is Founder and Head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. Peter is also Associate Portfolio Manager for the i2i Long/short U.S. Equity Fund.