Why Sector Funds May Have Dimmed the Lights on Plug Power Stock

Stock Market

Though many publicly traded companies enjoyed surprisingly robust demand following the initial onslaught of the novel coronavirus, very few delivered the gains that Plug Power (NASDAQ:PLUG) did to its lucky stakeholders. On April 20, 2020, PLUG stock closed at $4.42. Following a series of frenetic trades, shares eventually found themselves at $73.18 on Jan. 26, 2021.

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That translates to a 1,556% profit, a searing result for a little over a half year’s worth of work. While it’s tempting to explain the sentiment as nothing more than dumb speculation — we have seen some junk firms receiving ridiculous valuation spikes — the narrative for PLUG stock enjoyed political tailwinds. With the election of President Joe Biden, his promise to bring American to net-zero emissions by 2050 certainly helped the cause.

However, just as quickly as PLUG stock skyrocketed, it appears that it’s on its way to crumbling back down to its prior price range. Between the Jan. 26 session to April 19, shares cratered nearly 66%. If America cares about clean and renewable energy, it has a weird way of expressing it.

But The Wall Street Journal came up with an interesting take: the negativity in PLUG stock and similar investments could be tied to “mania for clean-energy stocks.” In turn, the nuances of index and sector funds may have exacerbated the volatility.

To briefly summarize, extreme bullishness made the clean energy sector unsustainable. As popular exchange-traded funds rebalanced – cutting out old names, bringing in new ones – this dynamic created acute boom-bust cycles among winners and losers. PLUG stock was one of those losers.

Further, it’s not a unique argument. According to The Atlantic, index funds could be bad for the economy. By mirroring the market instead of picking winners and losers, index funds tend to combine solid performance with low fees (due to their passive management nature). But their success also created an oligarchy within Wall Street.

More Pain Might Be in Store for PLUG Stock

To put the threat of these sector-driven exchange-traded funds in another light, they don’t allow individual investments like PLUG stock to grow organically. Rather, the indexing of stocks creates speculation highs and lows.

As you can imagine, it was great riding the Plug Power bull. You can’t quite say the same about the erosion, unless you were short PLUG stock. The point is, the inclusion and expulsion of stocks in key ETFs drive investor sentiment rather than the fundamentals.

This is one of the principal concerns about indexing, according to financial economist Jeffrey Wurgler. For instance, when a company is listed in the S&P 500 index, its price fluctuations “magically and quickly” change. Wurger writes, “It begins to move more closely with its 499 new neighbors and less closely with the rest of the market. It is as if it has joined a new school of fish.”

Basically, if I’m interpreting and deducing these arguments correctly, ETFs facilitate internal freneticism. For instance, once a fund picks up a stock, its price rises thanks to speculation of future upswings. As well, the newly included stock adopts the characteristics of the ETF, serving a self-fulfilling prophesy of positive mobility.

Everything is fine and dandy until eventually, it’s not. At that point, a rebalancing initiative could see individual losers exiting an ETF. Of course, this catalyzes more pessimism, contributing to quick and severe corrections.

Moreover, writing in The Atlantic, Annie Lowrey notes that the power of ETFs can influence power brokers in ways that were not possible before these passively managed vehicles arrived on the scene. Thus, the volatility that we’re seeing in PLUG stock might not be due to its fundamentals but rather how it ranks relative to sector funds.

The Market Is Speaking Loud and Clear

It then raises a question: without ETFs, would we have seen a natural rise in PLUG stock rather than the chaos that has printed on its chart?

PLUG stock is currently the second-biggest holding in Direxion Hydrogen ETF (NYSEARCA:HJEN) at 7.3% of the assets in the 31-stock portfolio. The ETF is down 3.32% over the past month; PLUG shares are off almost 26%.

In my opinion, if we eliminated many of the tools in the equities market, we would see more organic valuations. For instance, real estate (barring today’s extreme speculation) tends to move slowly in most economic cycles.

Nevertheless, this is philosophical at this juncture. What’s most important is that, whether by ETF or by the fundamentals, the market doesn’t believe in PLUG stock. Shares have dipped below both their 50-day moving average and their 200 DMA. To me, this suggests the bears have control.

While I’m not going to tell you what to do with your money, you may want to consider sidelining Plug Power until the market provides you a better read. PLUG is just too frenetic for most investors to be comfortable with.

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

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.