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There’s a Simple Reason to Not Bother with Kaixin Auto

InvestorPlace logo InvestorPlace 1/4/2021 Chris Markoch
a close up of a green umbrella: a charging station for an electric vehicle (EV) © Source: Shutterstock a charging station for an electric vehicle (EV)

2020 was a year when nothing should really surprise investors. However the price movement of Kaixin Auto Holdings (NASDAQ:KXIN) is a genuine curiosity. As recently as October 13, KXIN stock was trading at just 54 cents per share. In fact, the stock was trading for below the $1 mark for most of the year.

a charging station for an electric vehicle (EV) © Provided by InvestorPlace a charging station for an electric vehicle (EV)

Yet in mid-October the stock price jumped to over $8 per share. Then after dropping back to about $3 per share, the stock soared nearly $9.50 per share. And it’s fair for investors to ask why? In fact, at least one of the leaps seemed to surprise the company itself.

It would seem that shares of KXIN stock are being propelled higher on little more than a role the company may have in the electric vehicle (EV) sector. But what exactly is that role?

What Business Is Kaixin Involved In?

Let’s start with what I think I know. Kaixin is, or was, involved in the used car trade. The combination of a Chinese company helping finance used cars in a country as populous as China must have sounded more attractive than it was. Because as Will Ashworth wrote, in 2018 Kaixin exited the financing business and became an auto dealer with its own brand, the Kaixin Auto Brand.

At first glance this pivot seemed to work. The company more than doubled its revenue in two years. However it posted an operating loss that was five times higher in the same timeframe. That’s rarely a formula for success.

And it probably explains why KXIN stock has barely moved in the year prior to this past October.

Now it appears Kaixin has received a lifeline from Haitaoche, a private Chinese firm that now has a majority stake in Kaixin shares. This has raised a question among InvestorPlace writers of what business Haitaoche is involved in.

For now, I’ll go with Josh Enomoto’s presumption that the company is involved in e-commerce by selling secondhand EVs.

Are There Enough Used Tesla’s In China?

Let’s assume for a second (and it’s a big assumption) that buying KXIN stock is simply a way to play the Chinese used EV market. That would sound somewhat reasonable wouldn’t it? The EV market continues to grow in China. At some point, those vehicles will have to be replaced.

However, in 2019, the Asia Times reported, “Nobody in China wants a used electric car – unless it’s a Tesla.” This is because, as the Times reported, many Chinese EVs do not command a high residual value.

We all know that a vehicle in whatever form begins to depreciate as soon as you drive it off the lot. Quartz indicates that a conventional vehicle may hold between 60-75% of its value after three years. However for electric vehicles, that drop accelerates. In fact, some EVs (that are not branded Tesla) only retain 35% of its value after one year.

By contrast, Tesla (NASDAQ:TSLA) models hold up to 70% of their value after the first year. In fact, in 2019, Quartz reported that many of China’s used car dealers would not take a second-hand EV unless it was a Tesla model.

That means that aside from Tesla EVs, this isn’t going to be a particularly lucrative market. Just something to think about.

Cheap Stocks Are Usually Cheap For a Reason

The axiom to “buy what you know” may seem overly simplistic even in this data-driven age. Today, many (not all) traders don’t concern themselves with the fundamentals of a stock. As the pandemic has created a new class of traders, many stocks are climbing because investors are enjoying the rush of the “pump and dump” strategy.

KXIN stock isn’t moving higher because of real news. The stock is likely moving higher because someone (or lots of someone’s) are seizing an opportunity.  That’s not a game you want to play. As the saying goes, gambling only pays when you’re winning.

KXIN Stock Has a Murky What and Why

Generally speaking, you should be able to know not just why you’re investing in a company, but also what you’re investing in. In the case of Kaixin Auto Holdings, I don’t know if I can answer the what. And If I can’t do that, there’s no reason to get involved with KXIN stock.

On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.

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