Trading EV stocks is no joke. Shares of
which slid on Tuesday and all opened lower in response to bad news, have staged a big comeback, signaling that investors believe the bull market in the sector is here to stay.
All three U.S.-listed Chinese electric-vehicle were down about 10% in premarket trading after Li Auto (ticker: LI) announced a secondary stock offering months after completing its initial public offering in late July. Stocks often trade down when new shares are issued because investors don’t like to see their existing stakes diluted. And when management sells stock, it can be taken as a sign the shares are fully valued, given that management teams typically don’t like to offer stock for less than they think it is worth.
Shares of all three Chinese EV producers are certainly highly valued. The Chinese three are worth more that the Detroit three,
Fiat Chrysler Automobiles
(FCAU). The Chinese stocks are up about 120% on average over the past three months.
Adding to the negative sentiment was investors’ concern about what potential U.S. legislation means for U.S.-listed Chinese stocks. Congress is slated to vote on a bill that would require Chinese firms to abide by U.S. auditing standards. Failure to do so would result in being delisted.
That means a company would have to seek a listing on another stock exchange, likely making it more difficult for U.S investors to trade those shares. Of course, companies would likely have years to comply.
All the bad news is being shrugged off by investors. Near midday on Wednesday, Li stock was up 0.4%, NIO shares had gained 2%, and XPeng stock rallied 5.7%.
The reason for the reversal isn’t easy to discern. Goldman Sachs now expects EVs to increase their share of the Chinese market more rapidly than it anticipated previously, which means faster growth between now and 2025. But that news came out Tuesday morning. There doesn’t appear to be any new brokerage research boosting shares on Wednesday.
Wall Street traders asked about the reasons for the rebound had nothing definitive to offer. One pointed out that buying of call options on Chinese EV stocks, giving investors the right to buy shares at a fixed price, has been elevated recently. More call buying can help push stocks up. Brokers selling calls often buy the underlying stock to limit their risk.
Investors seem to be buying the dip after a big down day Tuesday, and a weak opening. That is classic bull-market trading action. Forecasting whether it lasts is as difficult as predicting daily stock moves in these three names.
Write to Al Root at firstname.lastname@example.org