A Smarter Way to Bet Against Tesla
Three months ago, I noted the soaring popularity of electric vehicle (EV) manufacturers on Wall Street. At that time, shares of Tesla (NSDQ: TSLA), Nio (NYSE: NIO), and Nikola (NSDQ: NKLA) were soaring.
Since then, Tesla and Nio have continued their rapid ascents. Over the past three months, TSLA has appreciated another 50% while NIO has doubled in value.
Nikola, however, has traveled in the opposite direction. It has lost two-thirds of its value over the same span. At a recent share price of $20, NKLA is trading at it lowest price since it started trading publicly in early June.
I closed that article by suggesting a mutual fund as a surrogate for the EV market. The Amplify Battery Metals and Materials ETF (BATT) owns shares of companies that provide the basic materials used to make the batteries used by most electric vehicles.
My reasoning was straightforward. If EV sales skyrocket in the years to come, demand for battery materials should also take off.
That has not yet happened. In fact, demand for lithium, the most prevalent material used in EV batteries, is expected to increase by less than 10% this year.
The price of lithium has fared even worse. Since the start of the year, the spot price for lithium carbonate has fallen by more than 20%.
If the major EV manufacturers really were expecting to produce a lot more cars next year, they would be stockpiling lithium batteries while the cost of acquiring them is low. Either they have found an alternative material to use for them or they will come up short of Wall Street’s aggressive sales projections.
I would not bet against the EV revolution. Consumers love the vehicles, and prices are coming down. What I would bet against is lithium.
Promises Kept, Promises Broken
I found a way to bet against lithium while doing research on Tesla. If my hunch proves correct, a small company in South America could soon be in deep trouble.
Last month, Tesla’s enigmatic founder, Elon Musk, announced that the company will start construction on a battery plant in the United States. According to Musk, his batteries will be considerably cheaper to produce and six times more powerful than the ones being used now.
Of course, Musk has a penchant for making audacious promises that excite Wall Street but fall short of reality. In this case, I’ll believe it when I see it.
However, simply the threat of internalizing the battery production process will provide Tesla with enormous bargaining leverage. Most of the companies that mine lithium are in less developed areas of the world with high levels of poverty.
Having a company like Tesla as your biggest customer is both a blessing and a curse. You can make a lot of money supplying Tesla with lithium for its batteries. But if the relationship ever sours, the drop-off in sales could be fast and steep.
That is what I think is about to happen to one of Tesla’s largest lithium suppliers. In September during Tesla’s annual “Battery Day,” Musk unveiled the company’s intention to begin building its own battery plant. Realistically, it may be years before a battery is produced by Tesla’s new facility. However, just the threat of the battery plant gives the company enormous bargaining leverage with its current suppliers.
That is one reason why I think this company may disappoint the stock market when it announces its third-quarter results next month. Lithium prices are low and the substance may be about to lose its biggest customer.
Wrong Place, Wrong Time
There are several ways you could profit from this news. One way is to buy a put option on the ETF mentioned at the top of this article. Put options increase in value when the price of the underlying security goes down.
The problem with that approach is that bad news for one supplier is not necessarily bad news for the entire industry. China is investing a lot of money in the EV market so its suppliers should not be affected by Tesla’s actions.
If you believe Tesla’s actions will upend the entire market, you could trade futures on lithium if you know how to do that. One word of caution, though. You will be in the pits trading against the best and brightest financial minds in China, so you better know what you are doing.
The simplest and safest way to play this bet is to buy puts on this South American miner. To be clear, I have nothing against the company. It just happens to be in the wrong place at the wrong time.
Last week in my premium trading service Mayhem Trader, I issued a special report that identifies this company by name and explains exactly how to make the put option trade I am recommending. In addition, I created a detailed tutorial that explains why I believe this type of trade could be immensely profitable in the weeks and months to come.
Editor’s Note: Jim Pearce, chief investment strategist of Mayhem Trader, has just imparted valuable investing advice. The market imbalances he describes have depressed the price of lithium, the so-called white metal. But these forces also have propelled the price of the yellow metal, gold. The price of gold probably has further to run.
The rule of thumb is for a portfolio allocation of 5%-10% in either gold mining stocks, exchange-traded funds (ETFs), or the physical bullion itself.
Looking for the best gold mining stock? Our colleague Dr. Stephen Leeb has pinpointed an under-the-radar gold miner that shines above the rest. This small-cap “rocket stock” is poised to blast off, but most of Wall Street hasn’t even noticed the company.
Dr. Leeb is chief investment strategist of the premium trading service, The Complete Investor. The time to invest in his gold mining play is now, before the rest of the investment herd catches on. Click here for details.