The electric vehicle (EV) industry is in an interesting position for potential investors. By and large, optimism on Wall Street has turned to pessimism as many start-up electric vehicle makers face cash constraints and slowing demand. However, electric vehicles still seem almost certain to become mainstream, and the tantalizing possibility of high long-term returns for those who choose one of the eventual winners in the space is a prospect that still captures the attention of many investors.
If you’re looking for clues as to which young electric vehicle company to choose, consider the following: A major hedge fund recently increased its stake Rivian Automotive (NASDAQ:RIVN) by 4,221%.
Why pursue hedge funds?
Monitoring hedge funds and the stocks they buy and sell can give investors insight into the ideas that fund managers think are best for them. Typically, a manager has a handful of great ideas that take up the largest positions in his hedge fund and a much larger number of diversified smaller ideas, each of which carries less weight. Essentially, a fund’s top holdings represent ideas in which we have greater conviction than its smaller holdings.
That’s why it’s notable that hedge fund Two Sigma Advisors supported Rivian’s stock price in the fourth quarter. The hedge fund increased its stake in the electric vehicle maker from around 275,000 shares to almost 11.9 million. This took Rivian’s position in the fund from an unknown position to a top 30 position out of well over 1,000 positions.
Are you greedy?
Warren Buffett famously advised investors to “be afraid when others are greedy, and be greedy when others are fearful.” In this case, Two Sigma Advisors appears to be striking just when other investors are fearful about the prospects for the electric vehicle industry .
To be fair, one needs to be cautious about the electric vehicle industry right now. Once promising automaker Fisker has all but collapsed after failing to find the financial rescue or investment it needed to continue funding its operations and is currently delisted from the New York Stock Exchange.
And the rest of this year is likely to be rocky for the industry as demand growth slows, there is a lack of affordable electric vehicles and higher interest rates make buying cars more difficult. But this could prove to be a good time to open or expand positions in the viable electric vehicle makers.
Is Rivian a buy?
Rivian has a lot to offer. The company reported a 167% increase in revenue in 2023 and reduced its gross loss per vehicle by approximately $81,000 between the fourth quarter of 2022 and the fourth quarter of 2023. Rivian also exceeded all aspects of its 2023 forecast and began offering leasing options for its R1 vehicles, which should help drive demand for them since they start at just under $70,000.
Management also made the decision to begin production of its R2 SUV at its original plant in Illinois instead of waiting for its Georgia plant to be completed. This will allow the launch date of the R2 to be brought forward while simultaneously utilizing the currently underutilized production capacity at the original factory. This will save the company approximately $2.25 billion in capital costs.
Rivian’s downside, like many young EV startups, is that it finds itself in a race against time. The company has total liquidity of about $10.5 billion, but also spends about $4 billion to $5 billion annually to fund and grow its business. Although the company is targeting positive gross profitability by the end of 2024, it still needs to refine its operations and build scale quickly over the next few years.
It’s no coincidence that Two Sigma Advisors chose to make a sizable investment in Rivian from the industry’s many options, but the stock is a highly speculative investment with plenty of risk. Still, Rivian appears to be one of the top EV startups to consider a position in (if not the top choice), at a time when the rest of the market is overextending due to slowing demand growth What is wary of these companies is the cash crunch challenges they face.
Should you invest $1,000 in Rivian Automotive now?
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Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
This giant hedge fund just increased its stake in 1 EV Maker by 4,221%, originally reported by The Motley Fool