Month: October 2022

Many of Australia’s top brokers have been busy adjusting their financial models again, leading to the release of a large number of broker notes this week.

Three ASX shares brokers have named as buys this week are listed below. Here’s why they are bullish on them:

Pilbara Minerals Ltd (ASX: PLS)

According to a note out of Macquarie, its analysts have retained their outperform rating and lifted their price target on this lithium miner’s shares to $5.90. This follows the release of a first quarter update which revealed production and shipments that were ahead of Macquarie’s expectations. This has led to the broker boosting its earnings estimates and valuation accordingly. The Pilbara Minerals share price is trading at $4.99 today.

Treasury Wine Estates Ltd (ASX: TWE)

A note out of Goldman Sachs reveals that its analysts have upgraded this wine company’s shares to a buy rating with an improved price target of $14.70. Goldman has become bullish on Treasury Wine due to the successful redirection of Penfolds China volumes and Treasury Americas’ focus on the premium market. Overall, the broker believes this will allow the company to grow its net profit in the mid-teens each year through to FY 2025. The Treasury Wine share price is fetching $12.65 on Wednesday.

Westpac Banking Corp (ASX: WBC)

Analysts at Citi have retained their buy rating and $30.00 price target on this banking giant’s shares. This follows news that Westpac expects its second half profits to be impacted by $1.3 billion of notable items. Citi highlights that most of this was already known and thus hasn’t had much of an impact on its estimates. As a result, it remains positive on Westpac and continues to rate it as a buy. The Westpac share price is trading at $23.92 this afternoon.

The post Top brokers name 3 ASX shares to buy today appeared first on The Motley Fool Australia.

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More reading

• Why Codan, Coles, Medibank, and Pilbara Minerals shares are sinking
• ‘Too far, too fast’: Pilbara Minerals share price falls on broker downgrade
• 22 high-yield ASX dividend shares Wilsons is targeting
• Up 16% so far this month, is it too late to buy Westpac shares now?
• Here are the 3 most heavily traded ASX 200 shares on Tuesday

Motley Fool contributor James Mickleboro has positions in Westpac Banking Corporation. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Treasury Wine Estates Limited and Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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In afternoon trade, the S&P/ASX 200 Index (ASX: XJO) is on course to record another gain. At the time of writing, the benchmark index is up 0.2% to 6,812.9 points.

Four ASX shares that have failed to follow the market higher today are listed below. Here’s why they are sinking:

Codan Limited (ASX: CDA)

The Codan share price is down 18% to $3.99. Investors have been selling this technology company’s shares following the release of a trading update at its annual general meeting. That update revealed that trading conditions have been tough so far in FY 2023. As a result, its first half profits are expected to be down as much as 50% over the prior corresponding period.

Coles Group Ltd (ASX: COL)

The Coles share price is down 3% to $16.12. This has been driven by the release of a first quarter update from the supermarket giant this morning. That update revealed softer than expected sales growth during the quarter despite a 7.1% jump in inflation. Management also warned that the company is “not immune to the inflationary cost pressures.”

Medibank Private Ltd (ASX: MPL)

The Medibank share price has returned from suspension and crashed over 16% to $2.93. Investors have been selling this private health insurer’s shares in response to its cyber security incident. Management estimates that costs related to the incident will impact its earnings by $25 million to $35 million pre-tax. And that doesn’t include any remediation, regulatory, or litigation-related costs.

Pilbara Minerals Ltd (ASX: PLS)

The Pilbara Minerals share price is down 7% to $4.99. This may have been driven by a broker note out of Citi this morning. According to the note, the broker has downgraded the lithium miner’s shares to a sell rating with a $4.60 price target. Citi made the move on valuation grounds, believing that its shares have gone “too far, too fast.”

The post Why Codan, Coles, Medibank, and Pilbara Minerals shares are sinking appeared first on The Motley Fool Australia.

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More reading

• ‘Too far, too fast’: Pilbara Minerals share price falls on broker downgrade
• Coles share price struggles despite ‘strengthening sales trajectory’
• Medibank share price plunges 15% as cyberattack bites into outlook
• Why is this ASX All Ords share crashing 20% today?
• Coles share price on watch following mixed first quarter update

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The S&P/ASX 200 Index (ASX: XJO) has lost ground following a strong start to the day.

In earlier trade, the ASX 200 was up 0.8%. That saw the benchmark index at its highest level in six weeks.

But the bullish run got hit with some headwinds in late morning trade following the release of the latest inflation data from the Australian Bureau of Statistics (ABS). That saw the ASX 200 slip to a 0.1% gain before currently regaining some ground to be up 0.3% during the lunch hour.

What’s the latest on Aussie inflation?

Investors hoping inflation was slowing were disappointed by the ABS report, revealing the Consumer Price Index (CPI) rose 1.8% in the September quarter. That brings the annual inflation level to 7.3%, significantly higher than consensus expectations.

Commenting on the data, Michelle Marquardt, program manager of prices at the ABS, said:

This quarter’s increase matches that of last quarter and is lower than the 2.1% result in March quarter this year. All three results exceed any other quarterly results since the introduction of the Goods and Services Tax (GST) and underlie the highest annual increase in the CPI since 1990.

Annual trimmed mean inflation leapt to 6.1% from 4.9% in the June quarter, the highest level since the series commenced in 2003. That could well trigger another big rate hike from the RBA and pressure the ASX 200.

According to Capital Economics senior Australian analyst Marcel Thiellant (quoted by The Australian Financial Review):

The 6.1% annual rise in trimmed mean CPI was a touch above the RBA’s year-end forecast of 6%. The stronger-than-expected rise in consumer prices in Q3 is consistent with our forecast that the Reserve Bank of Australia will hike rates more aggressively than most anticipate.

Also pressuring the ASX 200

Putting further pressure on the ASX 200 today is a sharp downturn in US futures.

Futures on the NASDAQ are down 2% while the S&P 500 is down 0.9%.

This comes following some disappointing results from US tech giants Alphabet Inc (NASDAQ: GOOGL) – or Google, if you prefer – and Microsoft Corporation (NASDAQ: MSFT).

Alphabet’s third-quarter revenue fell short of consensus expectations, which sent its shares down 6.7% in after-hours trading.

Microsoft, meanwhile, is down 6.6% in after-hours trade, on lower than hoped for revenue projections.

While the ASX 200 has lost ground today, the index remains in the green despite these headwinds.

The post ASX 200 heads downhill following latest inflation data appeared first on The Motley Fool Australia.

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More reading

• Here’s how I allocate my ASX share portfolio and why
• Nasdaq bear market: 2 magnificent US growth stocks you’ll regret not buying on the dip
• Why Microsoft stock is down 29% this year
• Tough year for leading global growth fund laid bare with brutal fall in tech stocks
• Is Google now joining the crypto party following its latest move?

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), and Microsoft. The Motley Fool Australia has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Tough economic environments often steer the market away from ASX growth shares and towards their dividend-paying cousins. And, boy, have there been some high-yielding ASX dividend shares this year.

My Fool colleague Bronwyn recently dove into the highest yields among S&P/ASX 200 Index (ASX: XJO) dividend payers in the September quarter – finding some come in at more than 15%.

No doubt that likely turned investors’ heads. Particularly, as capital gains have been harder to come by this year.

The All Ordinaries Index (ASX: XAO) has fallen more than 11% so far in 2022, while the ASX 200 has dumped around 10%.

But seeking out huge dividend yields is generally not the best way to build passive income. Keep reading to learn why.

Why high yields don’t always equal passive income

Listed companies pay their shareholders dividends for a variety of reasons. However, the most common payout represents a portion of a company’s profits for a particular period.

If a company’s profits suddenly soar – as did New Hope Corporation Limited (ASX: NHC)’s in financial year 2022 – they might pay out a notable dividend.

New Hope’s most recent final dividend represented a 343% year-on-year increase after its after-tax profit rocketed 1,138% to $983 million. That means the ASX 200 share is currently trading with a 13.4% trailing dividend yield.

Whether that’s sustainable is yet to be seen.

And that points to why investing in high-yielding ASX shares might not be the best way to build passive income.

Passive income, by definition, is sustainable over the long term without the need for serious intervention. Generally, high yields are hard to sustain.

I think an investor building a portfolio for passive income should ensure the companies they’re investing in can continue to pay notable offerings.

In some cases, a company’s profits are linked to an uncontrollable factor. For instance, New Hope’s revenue is tied to coal prices.

Other times, there’s just not enough headroom between a company’s dividend offerings and its net profits.

I would also be wary of a company that pays out nearly all of its profits to shareholders, unless they have a substantial cash balance ready to be employed in tough times.

Additionally, if a company has both a large debt balance and dividend yield, I would want to know why it’s not managing debt before paying shareholders.

Finally, when hunting for ASX dividend-paying shares, I’d consider their history.

If a company has long traded on a high yield while managing its balance sheet, that’s a positive sign that management might continue prioritising dividends.

If not, it might be worth seeking out dividend shares offering lower, more reliable payouts to help build passive income.

Searching for ASX dividend shares to buy

In my opinion, searching for dividend shares is very similar to hunting out future gainers.

A reliable ASX dividend share generally needs to be able to grow its profitability in order to grow its payouts.

I would personally look for strong businesses with good strategies and competitive advantages when building a portfolio for passive income. Though, there are many other ways to determine if a company is worth buying.

And, as always, I’d search for such companies across a variety of sectors so to diversify my portfolio.

The post Do the highest-yielding ASX dividend shares really offer the best passive income? appeared first on The Motley Fool Australia.

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More reading

• How to avoid making bad investment decisions on the stock market right now: fundie
• Could this represent another nail in the Zip share price coffin?
• Medibank share price plunges 15% as cyberattack bites into outlook
• Has the bottom of the share market now been and gone?
• Could the best be yet to come for the NAB share price?

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Here at The Motley Fool, we are obviously big fans of active investing and trying to beat the market. After all, what is the point of owning your own shares if not to try and achieve outsized returns. And yet, I still think that every investment portfolio should include at least one ASX exchange-traded fund (ETF).

An index ETF is designed to track an index as closely as possible. As such, a good ETF will never outperform the index it is tracking. But it will also give you the returns of said index. If an active investor fails to beat the market with their portfolio, then they would have been better off just owning the market in the form of an index ETF.

The best thing about an ASX share portfolio is that we can include all kinds of assets. There’s nothing stopping anyone from having a mix of (hopefully) market-beating shares and ETFs that track the markets.

So I view an index ETF as an insurance policy of sorts.

Why ETFs can improve an ASX share portfolio

Say an investor has 50% of their portfolio in individual shares and 50% in an ASX index fund like the iShares Core S&P/ASX 200 ETF (ASX: IOZ).

If that investor’s individual shares outperform the market, then the investor still has a market-beating portfolio. If they don’t, then the losses are cushioned by the half of their portfolio that tracks the market. Either way, the investor wins in my view.

It doesn’t have to be an ASX ETF either. There are a number of quality funds on the ASX that track markets outside the ASX. The iShares S&P 500 ETF (ASX: IVV), for example, follows the most-tracked index in the world: the S&P 500. The Vanguard MSCI Index International Shares ETF (ASX: VGS) is a similar fund but adds exposure to other advanced economies, such as Japan, Canada, and the United Kingdom.

This would add geographic and currency diversity to one’s ASX portfolio – even more insurance. Not to mention some of the best companies in the world, such as Apple and Amazon.com.

ETFs are simple, easy to invest in and cheap. So unless an investor is supremely confident in their ability to consistently pick shares that outperform the market over time, then I think having an index ETF in a portfolio is always a good idea. Especially for a beginner investor.

The post Why I think every investment portfolio should include at least one ASX ETF appeared first on The Motley Fool Australia.

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More reading

• If I’d invested $5,000 in Vanguard’s VGS ETF at the start of 2022, here’s what I’d have now
• The Vanguard MSCI Index International Shares ETF (VGS) dividend is being paid today. Here’s the tea
• The AUD is sinking, so is this a good time to buy Vanguard International Shares (VGS) ETF?
• Invest globally with these fantastic ASX ETFs
• Why has the Vanguard Index International Shares ETF been getting hammered lately?

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Motley Fool contributor Sebastian Bowen has positions in Amazon and Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon, Apple, and Vanguard MSCI Index International Shares ETF. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Amazon, Apple, Vanguard MSCI Index International Shares ETF, and iShares Trust – iShares Core S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The S&P/ASX 300 Index (ASX: XKO) is posting a modest gain on Wednesday, helped along by three shares that call the index home.

They’ve gained as much as 11.7% today amid, ahead of, and exclusive of, exciting announcements.

Meanwhile, the ASX 300 is up 0.27% at 6,794.4 points right now.

Let’s take a look at what’s driving them to outperform the iconic index this afternoon.

These 3 ASX 300 shares are taking off today

Among the top-performing ASX 300 shares today is Costa Group Holdings Ltd (ASX: CGC). The stock is rocketing 11.68% at the time of writing to trade at $2.49.

Its gains come on the back of news its historical parent company, Paine Schwartz Food, which spun Costa out in 2015, has bought a sizable chunk of its shares.

The private equity firm snapped up a 13.78% stake in Costa overnight, paying an average price of around $2.51 per share, as my Fool colleague James reports.

There’s yet to be any clue as to whether the firm might attempt to further increase its stake or make a play for the company.

Another ASX 300 share taking off on Wednesday is Vulcan Energy Resources Ltd (ASX: VUL). Right now, its stock is up 5.24%, trading at $7.23.

Interestingly, there’s been no word from the lithium developer – yet.

The company is expected to release its activities and cashflow report for the September quarter tomorrow. No doubt, all eyes will be on the stock on Thursday morning.

Finally, the Calix Ltd (ASX: CXL) share price is helping to buoy the ASX 300 despite the company’s silence. It’s soared 3.43% to trade at $5.73 at the time of writing.

While there’s been no word from the environmental technology stock today, it did open a $20 million share purchase plan, expected to issue new shares for $4.55 apiece, yesterday.  

It follows a $60 million capital raise the company undertook last week.

The post 3 ASX 300 shares off to the races on Wednesday appeared first on The Motley Fool Australia.

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More reading

• Could the pain ease for this ASX 200 share following a $160m after market raid?
• Why Life360, Novonix, Pilbara Minerals, and Vulcan shares are storming higher today
• 4 ASX lithium shares surging more than 10% today
• Vulcan share price rockets 12% on lithium update
• Top brokers name 3 ASX shares to buy next week

Motley Fool contributor Brooke Cooper has positions in Vulcan Energy Resources Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended COSTA GRP FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Latin Resources Ltd (ASX: LRS) share price could be heading a lot higher from here.

That’s the view of analysts at Bell Potter, which have initiated coverage on the small cap ASX lithium share today.

What is the broker saying about the Latin Resources share price?

According to the note, the broker has initiated coverage on the company’s shares with a speculative buy rating and 18 cents price target.

Based on the current Latin Resources share price of 10.5 cents, this implies potential upside of 71% for investors over the next 12 months.

Though, the broker warns that its speculative rating recognises a “higher level of risk and volatility of returns.”

What did the broker say?

Bell Potter is bullish on the Latin Resources share price due to its 100%-owned Salinas Lithium Project in the key Brazilian mining state of Minas Gerais.

It notes that an initial JORC mineral resource estimate (MRE) is expected by the end of 2022 and appears to believe it could be a sizeable resource that supports a large lithium operation. It said:

We estimate that LRS will deliver an initial MRE of up to 15Mt in December 2022 with defining features being a relatively high grade (~1.3% Li2O) and its delineation as a single deposit. […] we expect that the deposit could notionally support +200ktpa spodumene concentrate operation.

The broker concludes:

We expect material value accretion as LRS moves from lithium prospector to announcing a MRE at Salinas and ultimately defining its path to development. Our LRS valuation is based on modelling a notional project development at Salinas, heavily risked for its early stage of assessment. We expect the company to aggressively pursue the required feasibility studies and environmental permitting to de-risk Salinas with further potential upside from step-out and regional exploration over the short term.

The post Buy this small cap ASX lithium share: Bell Potter appeared first on The Motley Fool Australia.

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More reading

• ‘Significance cannot be understated’: Why this ASX lithium share is surging on Wednesday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Federal Court has imposed a $25 million penalty on Australia and New Zealand Bankng Grp Ltd (ASX: ANZ) for failing to provide promised benefits to customers.

The court found that, over a period spanning 20 years, the bank failed to provide 689,000 accounts features like fee waivers and interest rate discounts that they were eligible for.

The remediation for the breaches will total $211 million.

Australian Securities and Investments Commission deputy chair Sarah Court said having systems in place to make sure customers receive their entitlements is “not an optional extra, it is a requirement”. 

“ANZ is a large financial institution that for many years failed to prioritise and deploy the systems and processes necessary to fulfil its obligations,” she said.

Customers paid for benefits never received

ANZ’s violations involved customers of its Breakfree package, which was supposed to waive fees and reduce interest on products like home loans, credit cards, and transaction accounts in return for a single annual fee.

The breaches also involved customers with offset facilities on their home and business loans, which was meant to reduce their interest liabilities.

The civil case heard that these benefits were not always granted to the customer.

The bank was found to have contravened the ASIC, the corporations, and the national consumer credit protection acts. The court concluded ANZ misled customers when it told them it had “adequate systems and processes” to provide them the benefits.

The Motley Fool has contacted ANZ for comment.

The case was the final court filing from ASIC’s enforcement investigations arising from the financial services Royal Commission. There are still seven more cases yet to be resolved.

Not intentional is not an excuse

Justice David O’Callaghan noted in his judgement that ANZ’s breaches went on for a long time and affected a massive number of clients, leading to a huge dollar amount to be remediated.

“There was also a significant delay in identifying impacted customers, and therefore remediating them,” he said.

“Although the nature of the acts or omissions comprising the contraventions was that of inadvertence, the conduct continued as long as it did because of inadequacies within ANZ’s systems, which were compounded by inaction or ineffective action.”

The court also ordered ANZ to publish the details of the penalty on its website and online banking login page.

The post Own ANZ shares? Here’s why the bank just copped a $25 million fine appeared first on The Motley Fool Australia.

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More reading

• 22 high-yield ASX dividend shares Wilsons is targeting
• ASX 200 bank shares have had a stellar month. Here’s why this expert is now worried
• Why is the ANZ share price underperforming other ASX 200 banks today?
• Is the ANZ share price a buy ahead of next week’s full-year results?
• ASX dividend shares ‘likely to remain attractive’ despite rising bank deposit rates: expert

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The S&P/ASX All Ordinaries Index (ASX: XAO) is only just in the green today, up 0.25%. In the year to date, the 500 biggest ASX shares represented by the All Ords index have lost a collective 12%.

As every investor knows, it’s been one seriously bumpy ride. And it’s set to continue from here.

So, how do we get through this volatility without making mistakes? And how do we find the courage to jump into a turbulent sea of red to take advantage of opportunities?

Investment theory is ‘easy’… in theory

Fidelity International’s head of investments Paul Taylor says investment theory is easy but “it’s the execution that’s hard”.

In an article in the Australian Financial Review (AFR), Taylor provides some tips for ASX investors today.

First of all, he acknowledges the challenges that ASX investors are experiencing in 2022:

Periods of volatility and financial downturn present us with a great opportunity to buy good quality companies at reasonable prices, but it’s difficult to put this into practice in an uncertain environment.

The disconnect between what we should be doing, and what we actually do is caused by distractions or “noise”.

5 tips for buying ASX shares today

Here is an abridged version of Taylor’s opinion piece in the AFR today.

1. Focus on what is important. What’s most important can vary from company to company, but essentially the aim is to peel back the layers of often interesting but unimportant information. Think of it as creating a 90-second elevator pitch. … the essence of your investment theory.

2. Facts versus emotions: To make good investment decisions, it’s important not to get swept up in emotion and concentrate on the facts. My best days are when I am out talking to companies and getting a 360-degree view of their operating environment. My worst days are generally when I’m sitting at my desk watching the market go up and down. This is when I risk being sucked in by emotion and making decisions based on sentiment rather than fact.

3. Long term versus short term: I don’t think I can remember a time when we’ve been confronted by so much short-term noise. Inflation, cost-of-living pressure, geopolitical tensions, supply chain disruptions, pandemic hangover, erratic weather … But how much of this will be relevant in five or 10 years’ time? As investors, it is important to have a longer-term view and remember the fundamentals.

4. Simple versus complex: We all know and have probably, at some point, used the pros-and-cons concept to make a decision. In investing, this can sometimes muddy the water. I like to focus on the core reason for holding a stock. The No.1 reason it should be added or removed from the portfolio. Simplifying the process helps to screen out noise and keep me focused.

5. Proactive versus reactive: Being proactive involves making thoughtful decisions in line with your investment goals rather than allowing the market to push you around. So, evaluating companies on their fundamentals and asking, “is this going to be a good or better company in five years’ time?”

The post How to avoid making bad investment decisions on the stock market right now: fundie appeared first on The Motley Fool Australia.

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More reading

• How I’d build a portfolio by investing in top ASX shares now
• 5 things I love about investing in ASX shares
• 3 ASX All Ords shares smashing multi-year highs today
• It wasn’t all bad news for ASX All Ords shares on Monday. Here are some big winners
• Top broker says opportunities abound for ‘high quality’ ASX shares

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

On another bright “green” day for the stock market, shares of electric vehicle manufacturers are doing better than most. As of 11:05 a.m. ET Tuesday, shares of EV leader Tesla (NASDAQ: TSLA) had surged by 5%, well outpacing the S&P 500 (which was up a solid 0.9%). Electric truck rival Rivian (NASDAQ: RIVN) was doing even better with a 6.9% gain and Chinese EV maker Nio (NYSE: NIO) was doing best of all — up 7.8%.

But news from Tesla was probably the main reason for all of these gains.

So what

As multiple sources reported, Tesla on Monday announced it was cutting the prices for its popular Model 3 sedans and Model Y crossover EVs in China by as much as 9%. As The Wall Street Journal reported, a “standard” Model Y in China now sells for the yuan equivalent of just $39,800 — versus the $58,190 price being charged for a “long range dual motor AWD Model Y” (the cheapest model shown on Tesla’s website) here in the U.S.    

Now why would investors think this is good news? After all, as my Foolish colleague Travis Hoium just pointed out, all else being equal, a 9% reduction in MSRP can easily translate into a 9-percentage-point reduction in operating profit margins. So if Tesla earned 17.2% margins on its cars last quarter (which it did, according to data from S&P Global Market Intelligence), cutting the costs of some Tesla cars by 9% could mean cutting its profits on those cars in half.

If you assume (as seems logical) that rivals Rivian and Nio will have to cut their prices in order to compete with Tesla, that would seem to foreshadow falling profit margins across the board in the EV sector.

Now what

That, as they say, is the bad news. But here’s where the news might be a bit better for Tesla, Rivian, and Nio. One reason why Tesla is able to cut prices so drastically, says CEO Elon Musk, is that the costs of the commodities it requires to build its cars “are dropping a lot” and the company now anticipates that it will “see some cost reduction in 2023.”  

So it seems that while Tesla is sacrificing some of its profit margin through EV price reductions, it may also be gaining some profits back farther up the supply chain. As long as the cost of manufacturing Teslas (and Nios and Rivians, of course) falls in tandem with the prices these companies charge for their EVs, there’s a chance that lower car prices won’t mean lower profits for their makers.

Or so investors seem to be hoping Tuesday.

Is that a smart bet? Maybe. It’s still possible Tesla’s price cuts will spark a price war among EV makers. There’s also the potential for the still-rising cost of some commodities — lithium in particular — to mess up the math and prevent Tesla and its peers from cutting their total costs enough to make up for their price cuts. When you get right down to it, your safest bet is still to avoid the riskier stocks in this space like Nio and Rivian — neither of those companies is currently profitable — and focus instead on Tesla.

Trading at 59 times trailing earnings, Tesla still isn’t what I’d call a cheap stock. But at least it’s cheaper than the alternatives. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why Tesla and other EV stocks popped today appeared first on The Motley Fool Australia.

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More reading

• Here’s how I allocate my ASX share portfolio and why
• This famous investor is buying Tesla shares again. 3 reasons you should too
• Why Nio and more Chinese EV stocks crashed on Monday
• Why Tesla stock tanked today
• Is the Core Lithium share price at risk following Tesla’s disappointing earnings?

Rich Smith has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Nio Inc. and Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.   

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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