Back on Nov. 23, I laid out the fundamental bull case for Chinese electric vehicle manufacturer Xpeng (NYSE:XPEV) stock.
First, the company is plying its trade in an incredibly relevant sector. Second, it’s delivering the goods, both in terms of attractive EVs and strong financials. And we can’t forget that about one-fifth of the world’s population lives in China.
Despite this, the premium for XPEV stock was overstretched.
I’m all about the long-term narrative, as you can tell from pounding the table on the roaring 2020s. But at the same time, I’m realist. We’ve seen this setup before.
As I stated back then, “I do think XPeng stock has a pullback in it at some point. These kinds of parabolic rallies often lead to a reversal. The market as a whole looks jittery, especially for high-valuation stocks.”
I couldn’t have called it any better. Though the following day went onto make a record intra-day high, Nov. 23 was the highest closing high. At time of writing, XPEV stock has shed more than 41%. That puts shares at levels approximately right before they posted three consecutive robust sessions to the aforementioned plateaus.
For those who were thinking about buying XPEV stock, this might be the discount that I’ve been warning about.
To be sure, I wouldn’t go all-in at these prices. Volatility tends to beget volatility, which is why financial analysts almost always recommend not attempting to catch a falling knife. However, this is a great time to consider dollar-cost averaging, especially if you were a prospective buyer earlier but didn’t pull the trigger. Over the long run, XPEV stock has the fundamental substance to pleasantly surprise stakeholders, as I previously detailed.
But there’s another overlooked catalyst that I’d like to explore next.
Money Will ‘Logically’ Float Back into XPEV Stock
Even before the pandemic, many people questioned my bullishness in the equities market. To briefly summarize the other position, valuations have become detached from reality. Invariably, then, a correction must follow.
However, the critics are denying themselves an opportunity at potentially life-changing profits. That’s because with investments like XPEV stock, you’re not just wagering on a business. Rather, we’ve hit a juncture where technological innovations, combined with the greatest wealth transfer in U.S. history from baby boomers to their children, will catapult relevant, viable assets to unprecedented plateaus.
Still, with the pandemic’s disruption, the disassociation argument has understandably gained steam. How can speculative names like XPEV stock continue to defy gravity? It turns out, the equities market is the only logical place to be.
Though many debate the psychology of stocks, they’re actually one of the most rational assets as they’re tied to monetary and economic policies. For instance, back during the Great Recession, the Federal Reserve acted as a lender of last resort, essentially backstopping the economy. The result was that the “real” interest rate (the 10-year Treasury yield minus the inflation breakeven rate) fell toward and eventually below zero.
Now, a negative interest rate is exactly what it sounds like – basically, you pay a bank to hold onto your money. Obviously, this is a nonsensical proposition for most people. Because of this dynamic, people are incentivized to do something, anything, with their cash. Naturally, the stock market provides a welcome home.
Of course, equites are risky. But by holding money in a bank, sophisticated investors realize that this is akin to guaranteed losses. Therefore, cash continues to pour into the market as it did during the recovery phase from the Great Recession.
Add Some FOMO and You’re Off to the Races
To be clear, the Fed can’t continue this negative interest rate experiment indefinitely. This is a stopgap to re-instill confidence in the market – a tactic that the central bank used expertly to navigate us out of the wake of the last recession.
In the meantime, money will continue to engage in the equities market as one of few logical places to park it. But even as real interest rates get back into positive territory, the yield will be extremely low. There will still be strong incentives to put cash to work in the capital markets.
Further, those who have been sitting on the sidelines will see that names like XPEV stock have moved higher, first on the monetary dynamic I described and also for its underlying fundamentals (i.e., the technology of 21st century transportation in burgeoning market). Thus, once we’ve gotten past this pandemic, the fear of missing out (FOMO) will do its trick.
This might take some time to fully materialize. While you’re waiting, this is an ideal opportunity to take some of the discount in XPEV stock.
On the date of publication, Matthew McCall did not have (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.