If there’s one thing the investment profession repeatedly teaches you it’s humility. If you invest long enough, stocks will humble you, and I’ve had my share of humbling events. The most recent being the astronomical ascent of Tesla’s stock (NASDAQ: TSLA), which recently surpassed $2,000 per share. When I penned the article, “Is Elon Musk’s Dream Becoming an Investor’s Nightmare?” Tesla shares were trading at $230. That’s an astonishing 900% increase over 16 months for a stock investment I warned would “be wasting your time with this circus act.” So, is it time for me to eat crow?
Not So Fast – It’s Complicated
Whenever it appears that I’ve made a bad investment decision, I always go back to our process and what led to a decision to buy or not to buy a stock. For instance, with Netflix, I humbly admitted that selling the stock after a measly 70% gain within two months of purchasing it in 2011 was a bad investment decision, considering that it has gone on to gain another 4000%. It was actually a good investment decision until it was a bad investment decision. It wasn’t necessarily a bad decision because I sold too soon. After all, we earned a 420% annualized return for our clients. It was a bad decision because I had no real investment process or decision framework to inform me and teach me so that I wouldn’t make the same mistake again.
After this, an epiphany of sorts led me to our financial analyst, Frank Corbett, as well as the creation of a proven investment process that now informs all our investment decisions – both the decisions to buy and the decisions not to buy. Now, if you were to ask me if I would go back in time and do anything differently, I can turn to our decision framework for the answer. In the case of Tesla, it tells us we wouldn’t change a thing, and here’s why.
Our View of Tesla Then
When we looked at Tesla last April, it wasn’t just the fact that it had an upside-down balance sheet with a ton of debt and no equity. The perpetual missed promises and the inability to get cash-flow positive after so many years led us to question the sustainability of its business model and its viability as an investment.
At best, it was a speculative investment whose value is based more on perception than fundamentals. If you have enough investors who perceive the company can revolutionize the auto industry, they will push the stock price higher. With more capitalization, the company can raise more capital, build new factories, and increase revenues, which drives the stock price even higher. The hope is that Tesla’s underlying fundamentals can eventually catch up to the stock price, which is still not a certainty.
Our View of Tesla Today
When viewed again through that prism, Tesla’s stock is even more speculative today. Sure, Tesla is expected to generate about $30 billion in revenue this year. However, Ford (NYSE: F) and GM (NYSE: GM) both project annual revenue of more than $110 billion and Fiat Chrysler (NYSE: FCAU) is expecting to report $100 billion. Yet, Tesla’s market capitalization at $375 billion is more than four times the combined market cap of all three of the largest U.S. car manufacturers. Tesla’s market cap recently surpassed Walmart’s (NSYE: WMT), and, if it were part of the S&P 500, it would be among the top ten of those other overvalued companies.
What’s Driving Tesla Stock Now?
Tesla’s stock recently shot up 50% on the company’s announcement of a 5 to 1 stock split, which should attract more investors. The other price driver is short selling. Tesla is one of the most heavily shorted stocks in the market. As long as Tesla’s stock continues to rise, short sellers will have to cover their short positions, which means buying back the shorted stock and driving the stock price higher.
Finally, if rumors are true and Tesla’s stock is added to the S&P 500, index funds and ETFs that mimic the index will be forced to add Tesla shares en masse, driving the share price even higher.
Did We Get Tesla Wrong?
So, the big hindsight question is whether we got Tesla wrong. While all this may come to pass, which could drive Tesla’s shares even higher, the company comes nowhere near meeting our critical criteria as a great investment. We may miss out on another 1000 point gain in the stock, which would indeed be humbling. But, rather than focusing on what we missed, we would rather focus on what we know. Investors who dwell on what they missed tend to chase the next big idea for fear of missing out again, which invariably leads to disappointment.
We would rather focus on our own ideas rather than chasing others. There are plenty of investment opportunities for making money, and we would rather be in a position of knowing why we own a company and exactly how it expects to grow its capital over time.
