Last month, I discussed the peculiar narrative behind hydrogen fuel cell specialist Plug Power (NASDAQ:PLUG). Starting off as one of the most promising technology startups, PLUG suffered years of disappointment. However, the novel coronavirus pandemic has brought the company into a new light considering the vulnerabilities associated with fossil-fuel-based global supply chains. Suddenly, the left for dead Plug Power is now one of the hottest names on Wall Street.
But that wasn’t really my angle. Rather, I noted that PLUG has a very strong mathematical relationship with Tesla (NASDAQ:TSLA) shares. At the time, I wrote the following:
From the beginning of this year, Plug and Tesla shares have recorded a 97% correlation coefficient. Mathematically, the two securities in terms of their trajectory — I’m not talking about nominal price levels of course — are virtually identical.
I still stand by what I wrote because a) it’s math and b) the comparison still stands. From the start of January to the end of September, both PLUG and TSLA share a 97% correlation (96.8% if you want to be precise). Essentially, wherever TSLA goes, so too does PLUG.
Naturally, this led me to declare that if you want to buy Tesla at $13, you should instead consider PLUG. Although the two were trending nearly identically, the law of small numbers favored the profitability potential of Plug Power securities. Granted, it was a wild ride, but PLUG is finally making good on its mathematical relationship.
First Signs of a Relational Crack for PLUG Stock?
Nevertheless, what has bothered me about the strong relationship between PLUG and TSLA is that these two are similar largely in the sense that they’re both alternative energy platforms. Of course, the key difference is that Tesla focuses on battery plug-in vehicles while Plug Power specializes in hydrogen fuel cells.
Interestingly, Tesla’s Elon Musk derided fuel cells as “fool cells” and “mind-bogglingly stupid.” Again, these are his words, not mine. But the takeaway is this: both are attempting to save the environment but through different methodologies.
However, the case for battery electric vehicles seem more economically viable than hydrogen fuel cell vehicles. As battery tech improves, the cost for EVs has gone down, steadily making them affordable for people with modest incomes. Unfortunately, the same can’t be said about FCEVs.
While FCEVs are more efficient, the cost of hydrogen-based fuel is very expensive. Thus, this cost profile must come down for FCEVs to make sense. Coincidentally, the correlation between PLUG and TSLA has weakened recently.
To back up, in the year-to-date, the correlation between the two is 97%, a direct relationship. But from the end of July till end of September, the correlation dipped to 78%. While still a direct relationship, that’s a magnitude deceleration of nearly 20%.
In my opinion, that’s significant. We’re talking about a transition from a near-identical relationship to one that is very strong. This suggests that cracks are now beginning to surface for PLUG in its tracking of TSLA shares. Is it time for speculators to abandon this trade?
The Math, the Fundamentals, and the Technicals
While I can understand why some traders would have some concerns, the collective data is starting to look remarkably intriguing.
First, the fundamentals. While costs have been a sour spot on PLUG and other FCEV-related plays, increased scale of hydrogen fuel cell production alone could help reduce overall costs, making this platform viable irrespective of technological breakthroughs.
Second, there are political incentives to consider Plug Power. As you know, California Governor Gavin Newsom issued a sweeping executive order to ban the sales new gasoline-powered cars by 2035. It’s this kind of extreme progressive ideals that make the Golden State such a wonderful place to live. Not only that, California’s laws like AB5 fostered the destruction of the gig economy.
I think that’s so awesome because without the government, we would be completely helpless.
Anyways, the political trajectory is certainly great news for both PLUG and TSLA. Therefore, in the near term, I would expect the direct correlation between them to continue.
And that brings me to both the technicals and the mathematical rumblings. Yes, the correlation did dip in recent months. However, that doesn’t mean the overall implication has changed. Instead, it appears that PLUG and TSLA are forming different formations but with the same bullish intent.
I’ve created this side-by-side chart so you can see my thought process. With PLUG, I believe we’re looking at the “finishing touches” of a bullish flag formation. Currently, the bulls and bears are negotiating vigorously, producing a consolidation channel.
At the end of this consolidation channel, we should see a resolution to the upside. A similar concept is occurring with TSLA.
Here, the EV manufacturer has seen its aggressive trading whittle the price action down to an apex, possibly resulting in an explosive move higher.
Be Vigilant Over the Long Run
In the near term, I fully expect both PLUG and TSLA to jump to the upside. When you have positive fundamentals for both, and both shares are charting bullish signals, it’s no surprise that their correlation coefficient is likewise robust. Therefore, this is a high-confidence bullish trade for the next several weeks.
But once that bullish move is completed, I still have some questions. I’m not entirely sure that EVs and FCEVs will split market share with gasoline-powered platforms. Typically, Americans like their choices in binary terms; that’s probably why you don’t see a viable third party in U.S. politics and why there might never be one.
Bottom line, enjoy the profits that are about to come up. But don’t get too comfortable as the correlation could split off one day.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.