On a day when the broad markets got crushed – the S&P 500 and Dow Jones Industrial Average lost 725.81 and 68.67 points, respectively – Nio (NYSE:NIO) managed to eke out a 1.3% gain. That’s excellent news for owners of Nio stock.
I’ve been a fan of the electric vehicle (EV) manufacturer for 15 months. I think it’s an excellent long-term buy but only for those who can handle above-average volatility.
In my most recent article about Nio on July 1, I recommended several ETF alternatives to reduce your company-specific risk. I was especially interested in the First Trust NASDAQ Global Auto Index Fund (NASDAQ:CARZ), which currently doesn’t own Nio but does own most of the major automotive manufacturers.
On July 27, CARZ will track the S-Network Electric & Future Vehicle Ecosystem Index and become known as the First Trust S-Network Electric & Future Vehicle Ecosystem ETF.
“While the holdings haven’t been finalized, the index will contain approximately 100 companies involved in electric and autonomous vehicle technologies. I can’t say for certain, but I would imagine Nio will be one of the 100,” I wrote on July 1.
It could become a way to play Nio in the future. We’ll see shortly what companies make the cut.
In the meantime, I’ve got another option to play the EV marketplace that involves less risk than buying Nio itself.
Nio Stock Valuation
I don’t think anyone who owns Nio believes that the stock is cheap. However, based on $3.4 billion in sales over the trailing 12 months and market capitalization of $71 billion, it currently trades at 21x sales. Not even Tesla (NASDAQ:TSLA) has such a high price-sales multiple.
In fact, I would bet dollars to donuts that none of CARZ’s other top 10 holdings have a multiple as high as Nio’s. Speaking of top 10 holdings, CARZ owns BYD Company (OTCMKTS:BYDDF) at a weighting of 4.71%, making it the ETFs seventh-largest holding.
Citi analysts recently highlighted that BYD should produce 1 million new energy vehicles (NEVs) a year by 2023. NEVs include plug-in hybrids (PHEVs), battery electric vehicles (BEVs), and fuel cell electric vehicles (FCVs).
In June, BYD sold 41,366 NEVs, 26% higher than in May. Year-over-year, it increased NEVs by 192%. That’s significant growth. In the past four quarters, BYD generated $27.5 billion in sales, 8x Nio’s sales.
Now, I’ll grant you that BYD sells many vehicles powered by internal combustion engines (ICE), but the contribution from NEVs continues to accelerate. As a result, Citi believes BYD should have a similar P/S multiple to Nio. But it doesn’t.
BYD has a market cap of $75.6 billion and trades at 2.7x sales.
The Better Options
While I believe owning an ETF that holds both NIO and BYD is a smart way to go, an equally attractive alternative would be to buy Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), which owns 225 million shares, making it the holding company’s ninth-largest equity position valued at just under $6 billion.
In March, I called BYD one of Warren Buffett’s best stock picks of the past decade.
“Buffett bought 225 million shares of BYD in 2008 at approximately 8 Hong Kong dollars per share. As I write this, the shares are trading at 216.20 Hong Kong dollars per share, a compound annual growth rate of 28.9%. In U.S. dollars, Berkshire made a $225 million investment. That investment is now worth $6.3 billion,” I wrote on March 2.
Since this article, BYD stock has basically moved sideways. If it goes under $20, it’s a screaming buy.
However, for the risk-averse investor, Berkshire’s Class B shares make a better fit. The company currently generates $29.7 billion in trailing 12-month (TTM) free cash flow (FCF). Based on a market cap of $628.1 billion, BRK.B has an FCF yield of 4.7%.
Anything above 4% in this market is, in my opinion, a reasonable price to pay today for future appreciation tomorrow.
Of course, as I said in my July 1 article, you could always hedge your bet by putting 50% of your dollars set aside for an EV company in Berkshire and 50% in BYD or Nio.
I’ll leave the slicing and dicing in your hands.
The Bottom Line
Of the major Chinese EV manufacturers, BYD definitely has the cheapest valuation. But sometimes, cheap does not equate to good. That’s definitely not the case here.
BYD is an excellent way to play the EV market. However, if you want fund-like diversification, Berkshire stock is the smarter play. And, of course, if you’re an NIO fan, CARZ might turn out to be the best bet.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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