The Fed is raising rates. Rivian, Tesla feels the pain.

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2022 Rivian R1T.

Courtesy of Rivian

The growth stock carnage has hit high-valued and fast-growing electric vehicle stocks.

Fears of rising interest rates are bad news for companies whose profits are expected to grow rapidly in the future. The recent negotiation is a stark reminder that part of the return of any action, even


You’re here
(ticker: TSLA) – is not determined by the individual fundamentals of a company. Investing in math is important.

Tesla stock has lost 11% in the past three days. the


S&P 500

is down about 2%. the


Dow Jones Industrial Average

fell 1%.


Rivien
n Automotive (RIVN) shares are down 15%. Although the news that


Amazon.com
(AMZN) will purchase electric vans from


Stellantis
(STLA) contributed to this decline. Stock in Chinese electric vehicle manufacturer


NIO
(NIO) is down 12% in the past three days.

Stocks of traditional automakers are doing much better.


Ford engine
(F) and


General Motors
(GM) shares have actually risen over the past three days, by around 12% and 3%, respectively.

Investors haven’t suddenly come to believe that Ford and GM are the long-term winners in electric vehicles, although both companies are trying to win the electric vehicle war. All that happened is that the 10-year Treasury yield – a key benchmark interest rate – rose by around 0.2 percentage point. Rates are rising because investors expect the Federal Reserve to raise interest rates to fight inflation in 2022.

Higher rates hurt valuations of growth stocks much more than valuations of value stocks. It’s just math. Growth companies generate most of their cash flow in the distant future. Higher interest rates mean that future cash is not as valuable as it was when rates were lower.

“You see, when the discount rate goes up, the [growth] “History” must be brought back to the present. And the more distant this story, the more it is cut off (sic) by the cost of capital, ”Merion Capital Group chief strategist Richard Farr wrote in a report Thursday. “Therefore, companies that have a short-term return on capital – cash flow, dividends, return on equity, you know … all the things in the book that we’ve ignored for 14 years – matter far more than the [growth] The “story” that the company sold to everyone. ”

That’s a good explanation, but Farr is targeting growth investors willing to pay high PE ratios for “story” stocks. He is also attacking the Federal Reserve, which has kept rates low for a long time. “For 14 years, the Fed has put in place policies where everything must always go up. It doesn’t matter what your cash flow analysis says when the cost of capital is zero.

There’s another reason rising rates hurt growing businesses more than older, established businesses. Growth companies generally need capital – debt, for example – to grow. When interest rates rise, debt becomes more expensive. This leaves less cash flow for equity investors.

It’s hard to say when the carnage ends. The sale should stop when rates stop rising. Or when investors are convinced that interest rates will “take the stairs and not the escalator” like


SoFi Technologies
(SOFI) head of investment strategy Liz Young says so. This means that the rates are increasing in a slow and controlled manner.

Rates will skyrocket when the inflation data starts to improve. This means that all stocks, even EV stocks, are indicators of inflation and inflation expectations, at least for a while.

Write to Al Root at [email protected]

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