Sweden-based Volvo surprised the world in July by announcing that it would make only vehicles with electric engines by 2019. General Motors Co. ( GM) and Nissan also number among the slew of carmakers selling electric vehicles, and recently, Tesla ( TSLA) released its mass-market Model 3 electric car for sale.
Although the end of the internal combustion engine is still far away, hybrid-based and electric cars are becoming more common, along with the battery technology that makes those vehicles possible.
[See: The Top 10 Investment Portfolio for Millennials.]
Morgan Stanley analysts said in a May research report they expect electric vehicles to account for 50 to 60 percent of global light vehicle sales by 2040.
While some traditional automakers and companies like Tesla grab the headlines, investors shouldn’t overlook many other publicly traded companies in the electric vehicle market that also will help shape the cars of the future.
China has a big influence. Electric vehicles are still relatively new, with some of the more pure investing plays either small or foreign companies that are also more volatile. Although Volvo and GM also have a lot riding on electronic vehicles, they have other product lines that contribute to their stock valuations, analysts say.
And electric vehicles won’t dominate the auto market overnight. It takes time to turn over the global vehicle fleet, the Morgan Stanley analysts say. Even rapid sales growth for new electric vehicles still leaves a delay of more than a decade for the car population to catch up. Nevertheless, the analysts expect electric vehicles to account for about 40 percent of total miles traveled by 2040, a 32 percent compounded annual growth rate.
Morgan Stanley believes most of those sales will be in China and Europe, which together will account for about half of total global sales by 2040 because their regulations, fuel prices and demographics are hastening the trend toward electric cars.
Government regulations, especially standards for reducing carbon emissions, are driving the shift to electric vehicles, says Jesse Flores, a partner at Chautauqua Capital Management in Boulder, Colorado. Leading the charge in tighter carbon regulations are the Nordic countries in Europe as well as the rest of Western Europe and China, which has an incredibly large problem with pollution, Flores says.
China’s government has championed its domestic electric vehicle production, Flores says, noting the largest electric vehicle and battery manufacturer in the world is a Chinese company, BYD Co. Ltd. Because the stock is traded in Hong Kong, U.S. retail investors can access it if they are set up for foreign trading.
[See: Car Companies and the Race to Profits.]
Most U.S. investors haven’t heard of the company because BYD supplies the Chinese market primarily. Flores likes BYD as a long-term holding because it does everything from designing and manufacturing the electric vehicles to developing the battery technology.
Two other Chinese companies also are worth considering. Garvin Jabusch, chief investment officer at Green Alpha Advisors in Boulder, Colorado, likes Kandi Technologies ( KNDI) and Geely, which trades in Hong Kong. “Each has their own niche — Kandi with smaller cars, Geely with larger format-based vehicles — and they have a joint venture providing innovative electric vehicles,” Jabusch says. “Chinese market exposure here is interesting since the Chinese government appears to be serious about their war on pollution and is providing not only incentives but requirements for EV consumption.”
Don’t forget the supply chain. Electric vehicles have many high-tech parts and those suppliers are another way to invest in the cars of tomorrow. Fabrinet ( FN), for example, makes optical and electro-mechanical products and has a history of growth, says Bill Nasgovitz, chairman and chief investment officer at Heartland Advisors in Milwaukee.
His colleague Jeff Strong, a Heartland Advisors research analyst, says Fabrinet is a play on Tesla because the company supplies cameras for the Model 3. “They’re under the radar and they’re attractively valued. It’s a way to get exposure that we can never get directly in a Tesla,” Strong says.
Another pick is Linamar, Canada’s second-largest auto parts manufacturer, which trades on the Toronto Stock Exchange. Linamar is up about 20 percent this year in a very difficult auto stock market, Nasgovitz says, and it has a price-earnings ratio of about 8. The P/E ratio for the Standard & Poor’s 500 index is close to 20.
Although Linamar is known mostly for its power train products, Strong says the company is investing heavily in research and development to make other auto parts lighter and more fuel efficient, particularly for electric vehicles.
Jabusch says investors in the cars of the future should also look to integrated circuits firms, or chipmakers, which produce the parts that power electric vehicles. Of these chipmakers, which are “already fundamental to the car of the future,” Jarbusch likes Skyworks Solutions ( SWKS), Nvidia Corp. ( NVDA) and STMicroelectronics ( STM).
The smallest of the three chipmakers is also the most automotive-focused: Geneva-basd STMicroelectronics with a market capitalization of $15.1 billion. The company is coming off a strong second quarter for earnings, with revenue up nearly 13 percent from last year. The firm established itself in radio frequency identification chips, but now has become a leading chipmaker for cars. The company’s chips are used in the power trains for electric and hybrid vehicles as well as their safety, body and entertainment systems.
With a market cap of $19.2 billion, Skyworks specializes in system-on-chip and connected chip technologies and makes one of the most sophisticated motion sensor chips, Jabusch says. Those chips are also essential for “the processes that figure out where cars are, how they’re turning and in general what goes on with their kinetic state.” Skyworks also provide chips to “help the vehicle connect to everything from vehicle tracking systems to infotainment displays to tool transponders.”
Less of a pure play than the other chipmakers, Nvidia, which has a market cap of $102.4 billion, is best known for its top-of-the-line graphics cards (computer hardware for producing images on screens) that are used across digital devices. The firm is pushing into the autonomous-driving sector.
[See: 10 Ways to Invest in Driverless Cars.]
“The powerful chips provided by these firms have the horsepower to simultaneously handle power management and rapid charging, as well as more obvious uses like processing sensor inputs and connecting to the Internet of Things for autonomous driving and in-car entertainment,” Jabusch says.
More from U.S. News
High-Tech Investing: 7 Sectors to Watch
7 ETFs That Allow You to Invest in Space
The Fastest Ways to Lose All Your Money in the Stock Market
Investing in the Car of the Future originally appeared on usnews.com
