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EV Stocks Love the China Deal

Written by Briton Ryle
Posted January 20, 2020

I thought that electric car stocks would be among the big winners once the trade negotiations with China were codified in an official agreement.

I shared this theory with Wealth Advisory subscribers in the December Top 10 video when I picked a certain stock from that fine publication's portfolio as one of my picks. (Jason and I currently have 30 stocks in the Wealth Advisory portfolio. The average gain is 92% — gotta love a bull market!)

On November 25, I told you that I thought this electric car stock was on the verge of a nice rally. Sadly, the dart I was throwing that day didn't land on Tesla (NASDAQ: TSLA). Amazingly, Tesla has rallied a cool 52% since Thanksgiving.

And to think, I thought Tesla's stock was expensive at $335 a share! It's currently $510 a share, which is actually down from the $547 it hit last week.

One of the knocks on Tesla has been that it is not profitable, and the road to profitability seems particularly bumpy. You can put that concern aside. Tesla deliveries rose ~50% in 2019. Analysts now have an "E" to work with — pretty important if you wanna calculate a price-to-earnings (P/E) ratio. And who doesn't wanna do that?

PRO TIP: A P/E ratio attempts to indicate where the stock price is relative to earnings per share, but it's still not a smooth number. Think of a P/E ratio as the number of years it would take you to buy the company outright using only the company's profits. P/E of 10? It would take 10 years.

Tesla's Forward P/E Is 85!!!! 

85 years to recoup your Tesla purchase price seems like maybe not the best purchase a person could make, BUT Amazon's trailing P/E is 82, and Netflix is (gasp) 108... so maybe not so ridiculous?  

PRO TIP: Virtually all of 2019's gains for the stock market came from what's called "multiple expansion." A valuation metric like P/E ratio is called a multiple. So multiple expansion simply means that stock prices went higher and fundamentals didn't. Why? Because in bull markets, even crappy companies rally. The best companies seem to have a license to print money. They seem infallible. Punch-drunk (Kool-aid drunk?) investors reason that it makes sense to pay up for the best. 

Put simply: Elon Musk has succeeded. Wall Street is now convinced that Tesla is a profitable, viable company. One big reason shares have rallied so dramatically is that traders who have sold the shares short (a downside play) are being forced to buy Tesla stock to cover their shorts.

Another reason is China.

As I wrote on November 25: 

China's economy is kind of a disaster. The Commies are reining in electric vehicle subsidies, and demand has been slowing for over a year. Chinese electric vehicle sales fell 4.7% in July, 15.8% in August, and a huge 34% in September. 

This makes investing in the future of electric cars kind of tough. But I can tell you: This is how China operates. We've seen it in the housing market, with banks and infrastructure. The government starts throwing money around to push its agenda, and when things start getting a little too hot, they rein it in, and the economy slows for a little while. Then, after a while, they start throwing money around and things pick up. 

Honestly, I don't know if the Phase 1 deal was actually signed, if it's being translated, or what. But whatever happened, China announced that it wasn't cutting subsidies anymore. Happy days are here again.

25%: Not Too Shabby

The stock I wrote to you about back in November is Albemarle Corporation (NYSE: ALB)

So I think it's the lithium miners — the critical element for the batteries. Near as I can tell, when scientists do finally achieve a breakthrough that allows the batteries to store more energy and charge faster, they will still be lithium-ion batteries. 

The biggest lithium miner is Albemarle (NYSE: ALB). It's got a trailing P/E of 12 and a forward P/E of 13. Yeah, earnings are going the wrong way...

That's why the stock has been cut in half over the last year. Currently at $65, it's not that far from the $50 level, where it was in 2016 before the lithium mania. I kind of doubt it gets back to $50, unless something really dramatic happens.

So, right after Christmas, Angel Publishing moved into our own office building in a neighborhood called Mount Vernon in Baltimore's Midtown district. Our little video studio was broken down, which means the December Top 10 is pulling double duty for Wealth Advisory subscribers.

Jason and I each pick the five stocks from the Wealth Advisory portfolio that we like best for the next month and have a little competition. The 25% I've got on Albemarle has me looking pretty good...

But it's not a problem, pretty sure the 87% I've got on another one of my selections will seal the win. "87% in six weeks" you say? That's pretty good. Wealth Advisory is $99 for a year — a steal.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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