EnerSys Has The Best Odds In The EV Market

There is nothing I like more than when a big picture, fundamental narrative and a technical setup collide. Each can be reasons to initiate a trade in their own way, but when a long term bullish view is complemented by a likely short term support level it suggests that the big picture can be given time to play out, without risking excessive amounts of capital. That is the case right now with energy storage and battery company EnerSys (ENS).

The fundamental reasons for investing in the industry are two-fold. Firstly, the extremely successful launch of the Tesla Model 3 last night suggests that the electric vehicle (EV) is here to stay and could well end up being the future. Obviously, 150,000 orders for the new, more affordable Tesla is great news for that company, but it is also good news in many ways for EVs in general, and therefore battery makers such as EnerSys.

Not the least of that good news is that, after several delays, Tesla was able to produce the car at all. An EV that could profitably be sold for the same price as a fully loaded Honda Accord was the stuff of dreams when Tesla first launched the Model S back in June of 2012. Battery costs made up a huge chunk of overall production costs for that vehicle at over $300/KWh. The Model 3 is lighter and uses fewer batteries, but it is the cost reduction to below $200/KWh that has really made the vehicle viable. Oh, and by the way, Tesla's management expects those costs to drop by another third by the end of next year.

A large part of that is, of course, due to ramping up production in the company's own Gigafactory, but even so the fact is that the cost of powering EVs is declining rapidly as technology improves. That will make projects in the area more attractive to other car manufacturers, especially in the light of those 150,000 orders in 24 hours, and that, in turn, will benefit battery manufacturers. EnerSys does not currently do a huge amount of lithium ion battery business, but they do have capacity to produce them, so could be a major beneficiary.

The other part of the fundamental, big picture story that plays into the hands of ENS is the current disarray of the Republican Party here in the U.S. It is looking increasingly likely that whoever the party fields in the Presidential election will start from significantly behind in national polls, making another Democratic administration the most likely outcome later this year. Whatever you think of that in general the fact is that such an administration would almost certainly continue tax breaks and other incentives not just for EVs, but for energy conservation and storage systems generally. Once again, EnerSys could be a beneficiary of that.

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As I frequently tell the Energy Trader Team members, however, a good idea isn't a trade unless it sets up right. Fortunately that isn't a worry for EnerSys. The stock is in a bullish pattern of higher highs and higher lows and the low from the last minor correction, at 53.09, provides a logical level for a stop loss. That level, especially as it would roughly coincide with a clean break of the 50 Day Moving Average, will provide significant support, so a stop at around 52.70 makes sense and would limit potential short term losses to around 5 percent.

That combination of a compelling big picture narrative and a great, risk limiting set up is the perfect one for me. If the market in general turns sharply downward then the loss is small and manageable, but if the support holds and ENS begins to climb then the long term prognosis is good enough to let the position run and maximize potential profit.