As many of you know, the Pyle Group in 2020 made a significant shift in portfolio alignment in 2020 towards ESG (environment, social and governance) investing. Today, we maintain that this not only aligns with an evolving investor orientation towards things like reducing company carbon footprints, but it ultimately becomes a net positive action towards enhancing portfolio return over the long term. As institutional investors, like pension funds, mutual funds, private equity and family offices place higher emphasis on corporate ESG metrics, those companies that meet the tests will be in higher demand than those that don’t. Still, realism has to be applied in this rapidly changing investment landscape.

 

Back in June 2010, a seven-year old electric automobile maker came to the market with an initial public offering for 13.3 million shares on the NASDAQ at a price of $17 per share. The $226 million addition to the coffers at the company was seen as impressive for a car company that was making less than half the number of cars in a year that Ford made globally in an hour. That company was Tesla and the last decade of watching this breakthrough corporation has interesting to say the least. In the first half of its life on the public market, Tesla shares gained just over 300%. In another five years, the gain from its IPO would be almost 2,400% and, when the stock crossed $1200 last week it marked an improvement from IPO of 5,200%.

 

 

There were countless investors who got involved in this name on a speculative basis (aka short-term growth objective) and some in that segment made out like bandits, while others lost their shirt, depending on the news flow of the day. Long-term investors definitely did better, although the nagging question keeps coming up. Is this company going to remain the leader in the electric vehicle space and how soon before the number of competitors gets so large that its stock price today gets drawn into question. To be sure, all major car companies are ramping up their game in terms of getting zero emission vehicles on the road and their shares haven’t done too badly of late.

 

Ford shares have recently pushed above $20 for the first time since 2001 and GM shares are trading close to their record high above $63 set in June. Toyota has also staged a remarkable comeback since the start of the pandemic, even with supply constraints. On a side note, there was a lot of concern last month that automakers around the world were going to suffer from a shortage of magnesium (which goes into aluminum production), because of curtailed output in China. Prices vaulted to levels never seen 2008 before shooting to records in September, but they have since come back sharply. But I digress. The fact of the matter is that the boring auto sector hasn’t treated investors too poorly this cycle. The excitement though is coming from the electrification space. No surprise then that this week’s introduction of another new name – Rivian Automotive – drew so much interest.

 

 

While Rivian is six years younger than Tesla, the anticipation for its IPO and the level of interest it generated was well above what Tesla experienced. On Wednesday, the company came to market with its shares priced at $78. That was above the range of estimates going into the IPO, but the price at the open was a staggering $106.75 and that day marked the biggest IPO since Facebook. At the time of writing, the stock was trading north of $122 for a market cap of over $107 billion. That is $30 billion above Ford’s market cap and about $20 billion over GM’s. Not too shabby for a company that had delivered about 150 vehicles by the end of last month and doesn’t have green on the earnings screen for quite a while. Still, 158 is better than what Tesla initially cranked out, but is the margin enough to justify a market cap that is 4,600% higher than Tesla’s in 2010?

 

Time will be the judge of that, but there are some important considerations for investors looking at this as the next Tesla. For one, we are less than 15 years away from the target dates put forward by the world’s major auto producers for when they will be solely electric. That doesn’t mean their products will be on par with Tesla or Rivian, but the competitive advantage is going to ebb away. I don’t know how long Tesla can hold on to its “first past the post” alure to drivers and investors, but Rivian has carved out a space that isn’t exactly in the same demographic camp as Tesla’s sporty sedans.

 

Rivian specializes in pick-up trucks and vans. Trucks are going to be a tough space to play in now that the world’s best selling pick-up truck – the Ford F150 – is going electric next year. I have commented before that Ford’s new model is going to do a lot to support the transition to electrification, since if you can get truck owners to make the switch from the gas pump to a garage receptacle, the rest should be easy. An electric truck made by Rivian might turn some heads, but the F150 Lightning is going to win in the familiarity and trust category. The van part of the story for Rivian is a little more compelling and not because we are all going back in time to fond memories of soccer practices. Amazon has already put in orders for the vans that Rivian is about to produce to help it move towards it own carbon-neutral footprint objectives. The inclusion of autonomous vehicles is even better. Considering the impact the pandemic has had on labour supply, this is definitely a segment of the automobile sector that needs to be watched closely.

 

 

The above chart shows the Bloomberg Electric Vehicles Price Return Index, which basically incorporates the performance of not only producers of electric vehicles, but also battery storage companies and those involved in mining lithium and making fuel cells. We would suspect the upward trend in this industry continues, though there are a number of uncertainties; such as, can we generate enough energy “cleanly” to satisfy the increased electrical power needs from an increasing number of electric vehicles. Perhaps we now have two industry leaders in electric vehicles. The higher prices for gasoline at the pumps is certainly re-igniting demand for alternatives, as we would suspect. And stocks of companies that are positioned to benefit from this increasing adoption of electrification should do well over time. We just need to make sure that portfolio decisions are not driven by excitement over IPOs and more by fundamentals and long-term thinking.