How can an entire sector consist of companies all of which are priced as if they will soon dominate their industry?
That describes the Electric Vehicle (EV) sector — not just Tesla — and it has become a “big market delusion.” The phrase was coined by Brad Cornell, a professor at UCLA and at Caltech, and referenced in a recent research piece by Rob Arnott, Research Affiliates (RAFI) founder and chairman.
Arnott notes the companies in the EV space have risen together. While some will win and some will lose, they all cannot be better than average. When all of the companies in a single sector are priced as if each will be the outlier winner, e.g., stupendous success and overwhelming market share, we end up with the situation described as a delusion.
Of course, there will be some winners from the group, which in addition Tesla, include EV makers Lucid, Rivian, Polestar, Nio, Rad Power, Rimac, Sono, etc. Add in the traditional internal combustion engine (ICE) auto manufacturers, notably VW, Ford, Toyota and GM, and you have the making of robust competition. But not all of these EV producers can have a dominant market share, and collectively, the entire EV sector has become wildly overvalued.
RAFI created & patented a methodology for basing indexes on fundamental metrics instead of market cap weighting, and its strategies runs $157 billion in assets. The firm believes rebalancing portfolios on a fundamental basis relative to stock price creates additional performance at no additional risk relative versus rebalancing market capitalization indices.
A list of his favorite books is here; A transcript of our conversation is available here.
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Be sure to check out our Masters in Business next week with Jack Brennan, former CEO and Chairman of the Vanguard Group. When Vanguard founder and investment legend John Bogle decided to step down as CEO, Brennan was his hand-picked successor for the job, and ran the firm from 1996-2008.
