Tag Archives: nasdaqtsla

Ford Vs. Tesla

Summary I am not particularly bullish – slightly bearish, in fact – on the auto industry, but I see a relative value play between Ford and Tesla. Ford had a very solid 2014 and should build on that in 2015, barring a macro economic downturn. Tesla ended 2014 on a low note and will continue to bleed money into 2015 and beyond. A pair trade could be a low-risk way to play F and TSLA and largely mitigate the risk of economic distress. Earlier this month, I began a new mock portfolio here on Seeking Alpha: the Pairs Trade Portfolio; today I continue it with trades on Ford (NYSE: F ) and Tesla (NASDAQ: TSLA ). A pair trade is a market-neutral hedge in which an investor essentially pits one company against another. Getting a return on a pair trade is not dependent upon a particular stock rising or falling necessarily, but dependent upon the relative price moves between two stocks (or other financial instruments). I won’t go into details about the hows and whys of pair trading here, as I have already described the theory in detail in a previous article. Please take a look at the link for more information on why pair trades might be a good investment. Previous articles with pair trades for the portfolio: The Auto Industry The industry is extremely sensitive to the global economy as a whole. By and large, people don’t have a pressing need to buy a car and the purchase can normally be put off for months and even years and therefore in tough economic times car sales plummet. I think that notion of “purchase delay” has never been more true than now due to the fact that automobiles are more reliable now than ever. Because of the auto industry’s reliance on a good economy, I’m actually somewhat bearish to neutral on auto companies right now. I predict the global economy will underperform expectations over the next couple of years (at least) with an excellent chance of stock market crashes and recessions. I wrote a piece about the top 7 economies – that account for 74% of world GDP – in an article titled ” The Ingredients For An Imminent Bear Market Are In Place ” in which I noted why I felt that US equities, in particular, were due for a fall. So, why am I buying Ford and shorting Tesla for my Pairs Trade Portfolio? Well, because the whole point of a pair trade is to make an investment that takes out the uncertainty of outside events. By buying Ford and selling Tesla, I am making a bet on Ford vs. Tesla and that is all. If Ford stock drops to $8 per share and Tesla drops to $50, I’ve made money. If I am completely daft about the state of the economy and Ford moves to $30 while Tesla moves to $300, then I’ve still made money, though obviously not as much as I would have being solely long. The phrase “market-neutral hedge” is critical when talking about a pair trade. Again, if the reader has lingering questions about it, please click on the link near the top of this article for more information. And now onward to discussion of the two companies. Ford’s Prospects I consider Ford to be the best risk/reward choice of the automakers for a number of reasons, but three big ones come to mind immediately: Lower gas prices means more large vehicle sales and the higher profits that go with them. Ford rules in the pickup arena and 2015 could be a banner year for F-150 sales given low gas prices along with a redesign of the truck. Asia/Pacific sales. Cheap valuation. As for pickup sales, Ford is still the king and will likely stay that way throughout 2015. In January 2015 , Ford sold over 54,000 F-Series trucks compared to 36,000 Chevy Silverado sales. It appears that the public is responding well to the revamped F-150 and I expect it to be the best selling vehicle in the US for the 34th year in a row in 2015. I want to go into the Asia/Pac region in a bit more detail as I consider that region to be extremely important in the long run. I wrote about it in a previous article on Ford, saying that: Ford is executing well in Asia Pacific, which is the region with the most growth potential for the next decade (at least). However, keep in mind that Asia Pacific is not currently a large component of Ford’s business. Units sold in the Asia Pacific region represented about 21% of the total units sold for the company in Q1 2014. However, the revenues by region are as follows: Asia Pacific: 7.8% of the company total; North America: 60.4% of the company total; Europe: 22.9% of the company total. Those numbers were from Q1 2014. Today I am looking at Ford’s most recent investor presentation and I see many highlights pertaining to the region including: Asia/Pac employment increased 25% from 2013 to 2014; China market share increased from 4.1% to 4.5% (Y/Y); Record profit in Asia/Pac in 2014; Revealed new global Explorer and the all-new Everest for Asia/Pac; Over 1 million units sold in Asia/Pac in 2014. Clearly, Ford’s strategy in Asia is working well and the company is picking up profits in the region at a record pace. The growth prospects are enormous in that region and it is one that I will continue to keep my eye on. Finally, the valuation of Ford is cheap based on analyst expectations . The stock’s forward P/E for 2015 and 2016 is at 10.0 and 8.7, respectively. I’ve already noted that I am still not fully bullish on Ford because I think those estimates don’t take into account the risk of a serious miss. But it is worth noting the price of the shares based on those analyst expectations. There is solid upside to the stock based on earnings alone if macro events don’t derail it. Tesla Prospects I’ll stick with the Asia theme to start off and note that in January 2015, Tesla sold about 120 cars in China. That linked article also notes that “Musk has previously said he expected China sales could rival those in the United States as early as 2015.” The shortfall is important not just because Tesla’s market in China is non-existent, but also it shows just how incredibly off the mark Musk was in his prediction. If there is one common theme amongst the Tesla stockholders, it is the unshakable belief in the “Temple of Elon.” He is not infallible. As for China, Tesla has, to date, wasted its time and money on the country since 2013 (when orders began there) as it has basically nothing to show for its efforts. Moving on to some financial considerations, the company is spending money at an alarming rate. For example: The company spent $970 million in capital expenditures in 2014 while the 2013 capex was $264 million. A poor Q4 performance saw it post a loss of over $100 million – the loss was nearly $300 million for the full year. The company burned through a considerable amount of cash in Q4: $465 million. Long-term debt and “other long-term liabilities” increased from $881 million in 2013 to $3.069 billion in 2014. In addition to the added debt, Tesla is diluting its stock steadily in order to fund operations (the large steps upward) and pay management (the slower, grinding upward slopes): TSLA Shares Outstanding data by YCharts We can clearly expect to see more dilution and more debt in for the next several years in order to fund operations, capex, and compensation. Elon Musk predicted GAAP profitability in 2020 and I estimate that (if and only if all goes well) Tesla will show solid positive cash flow a year or two before that. Until then Tesla will need a lot of additional financing. There’s nothing wrong, per se, for a company to spend lots of money, incur debt, and even dilute its stock. However, when a company does those things and has a stock price that is (still) quite high and full of expectations, the bar is set extremely high for that company to execute. In other words, Tesla better be spending all that money wisely. Some Valuation Comparisons Ford’s market cap is about $62 billion and Tesla’s cap is about $25.5 billion and thus Ford is valued at just under 2.5 times that of Tesla. Some of the charts comparing the two companies are actually comical, but I think they illustrate my point well. First, the difference in revenue: F Revenue (TTM) data by YCharts Ford has about 45x the revenue of Tesla. Tesla is growing revenue much faster than Ford, but is so far behind its more established rival. The cash from operations: F Cash from Operations (TTM) data by YCharts Tesla has bounced up and down from negative to positive and back to negative again as the company struggles to limit the bleeding. I showed Tesla’s dilution above, now let’s see Ford’s shares outstanding: F Shares Outstanding data by YCharts There is a bit of upward creep there over the last few years, but it is minor – especially compared to Tesla. None of the above charts should be of any surprise to an investor in either company, but I think they do serve to show us the amount of faith that Tesla investors have. For the company to be valued at 40% of Ford means that an incredible amount of success is priced into the stock. In my opinion, TSLA should be no more than 10% of Ford. Conclusion At this point, a lot of things have to go right for TSLA stock to be worth the price it currently commands. The company will add more debt and it will dilute the stock further. Not only must Tesla continue to grow revenues and deliver cars at a rapid pace, but it must soon start to give us a glimpse of a profitable future. Moreover, Tesla is about to encounter ramped up competition in its EV space. General Motors (NYSE: GM ) has announced the development of a 200-mile range electric car that should directly compete with Tesla’s Model 3, set to debut in 2017. I have no doubt that many, if not all, major manufacturers will be making similar announcements of long-range EVs throughout 2015, including Ford (heck, maybe even Apple). At some point in the not-too-distant future, carmakers will have multiple EVs in the stable including luxury and sport models. How can TSLA stock stay, or indeed rise from, the level it is at when the company will no longer be unique? Ford, for its part is reasonably predictable, at least relative to Tesla. The stock does not move quite “…as peacefully and leisurely as a python digesting a Valium addict.” (Tom Robbins from Skinny Legs and All ), but it does trade, in the main, based on fundamentals instead of sentiment and hope. The company has a long history of success and should continue to grow and expand its success into new locations and with new models, including EV models. Ford (and all established car makers) has the advantage of being able to invade Tesla’s market whenever and however it chooses. Ford can and will make EVs that compete more directly with Tesla than they do now and when a big company like Ford moves into a small company’s space, there is a tendency for bad things to happen to the smaller company. The Portfolio At 8 p.m. Eastern Time on February 17 I’m buying F and shorting TSLS in my Seeking Alpha portfolio. Here is what the mock portfolio looks like so far after three pair trades (note that I plan on adjusting, adding, and updating this for years): A wee profit! Nice to see, although fairly meaningless this early in the game. Be sure to click “follow” if you would like to get real-time alerts on my future articles. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Invest In What You Know: Advice From Peter Lynch Is For Suckers

Summary Peter Lynch is the father of the very popular “invest in what you know” strategy that was very lucrative for him and has always enjoyed mass appeal. Today many names that are popular selections according to this strategy make terrible investments due to extremely overpriced stocks. Most people are not implementing the “invest in what you know” strategies the way Lynch intended. These days it may be more suitable to “invest in what you know” based on a personal edge gained from professional expertise. Peter Lynch is considered one of the greatest investors of all time because he managed the Fidelity Investments’ Magellan Fund in the 1980s, which was the best performing Mutual Fund in the world during that time. With average annual gains of over 29% it regularly more than doubled the yearly gains of the S&P 500. “Invest in what you know” is one of Lynch’s investment strategies that was not only very successful, but was easy to understand for the masses. He outlined his strategy in two highly popular and widely read books, One Up on Wall Street and Beating the Street , and many investors since have adopted the strategy. I also find this strategy very appealing simply for the fact that I can use the products and services that I already consume on a regular basis, but get the added satisfaction of contributing to the success of a company I partly own. However, today I find that Lynch’s philosophy is difficult, if not impossible, for many to profit from due to growth chasers and other investors who believe so strongly in a company that they are willing to pay any price for its stock. Buying a company simply because you like it is enticing and easy, but can lead to sideways performance, high volatility, or huge losses and as I will discuss in this article, is not the only way to “invest in what you know”. How Not to Invest In What You Know Many naive investors don’t know any better and will blindly make purchases of stock at insane multiples of potential future earnings simply because it is a company that they like. What’s worse is these purchases are made at times when reasonable growth is either already priced in or the company has reached its potential and future growth is limited. Three recent examples include: Amazon.com (NASDAQ: AMZN ) which has fallen 24% from a 52-week high of $408.06 to its current share price of $308.52. The stock still sports a very high stock price given the valuation of $145.85B, and the company is not profitable, with a loss of -0.47 per share in the last 12 months due to major expenses on infrastructure, customer subscription acquisition, and low margin contracts designed to gain market share. Netflix (NASDAQ: NFLX ) which has fallen 28% from a 52-week high of $489.29 to its current share price of $348.94. With a very lofty P/E multiple of 92.6, any potential future growth the company can receive is already priced into this stock, and then some. Tesla Motors (NASDAQ: TSLA ) which has fallen 24% from a 52-week high of 291.42 to its current share price of $219.31 These companies all have changed how industry operates and are forcing others to follow its lead by capturing the hearts, minds, and wallets of the public. I would jump at the chance to own NFLX or AMZN at a reasonable price because I love the services they provide and believe they have forced other companies to adopt a more consumer friendly business model to remain competitive. TSLA makes the only luxury electric car that is attractive and it has made huge strides in battery power storage, which makes it highly appealing to investors and consumers (I must confess I personally would not purchase stock in any company that relies on sales of vehicles over $70,000, a price I find ridiculous for any vehicle). The problem with investing in stocks like AMZN, NFLX, and TSLA is two-fold: Despite these companies being positioned for future growth and huge earnings, an investor’s risk of losing capital remains very high. Lofty investor expectations are priced into the current stock price and the risk of a huge drop in a short amount of time is dramatically increased if the company fails to meet the unrealistic expectations. Valuations continue to remain extremely lofty following the fall in share price that results from the company failing to meet unreasonable growth expectations. Even after the fall in stock price, there is no room for the investor to make money, and the investment becomes a speculation that the company will either beat lofty expectations repeatedly or you purchase based on technical analysis and the belief that other people (suckers) will be willing to pay a higher price in the future. I personally prefer to purchase stocks of good companies I believe will provide me a low risk of loss in the future due to a stock price below intrinsic value, and I don’t purchase stocks based on my belief that others will soon find it more desirable than it currently is. AMZN, NFLX, and TSLA are not the only examples of excellent companies with either a dominating market position, huge growth potential, or both, and sporting an extremely overvalued and unattractive stock price. Here are a variety of my favorite companies with overvalued stocks: Chipotle Mexican Grill (NYSE: CMG ) with a P/E of 52.9 The Habit Restaurants (NASDAQ: HABT ) with a P/E of 45.2 Starbucks (NASDAQ: SBUX ) with a P/E of 30.1 Visa (NYSE: V ) with a P/E of 30.8 Google (NASDAQ: GOOGL )(NASDAQ: GOOG ) with a P/E of 27.5 Don’t get me wrong, many investors have amassed huge returns from stocks in the above-mentioned companies and many will see huge returns in the future. However, I am trying to remain a disciplined investor, and the extreme valuations are more speculative to me considering the downside risk despite my natural attraction to stocks of companies I really like and I believe have excellent management and future growth potential. I was highly anticipating the recent IPO of HABT prior to its market debut on November 20th, because I love to eat at its restaurants, its casual dining atmosphere is appealing to customers, and management’s goal of growing from 99 to 2000 total restaurants. the growth potential is amazing, but I can only wait for the price to fall dramatically before I can even consider an investment. How did Peter Lynch do it? How to Properly Invest In What You Know First off, I don’t believe that Lynch’s investing advice is for “suckers” as my title suggests; in fact Lynch was living proof that when the strategy was used properly it was incredibly successful. It was so successful that he coined the term “ten bagger” to refer to investments that achieved a price 10-times greater than his purchase price. I doubt that Lynch would purchase the stocks discussed above at the current price, none of which have ten bagger potential at current prices. Lynch would purchase a stock when the company was small and had huge potential for growth before others in the investing community noticed. Getting in before others is really the key to making huge profits. As we have noticed recently with HBT and the amazing success of CMGs fast casual business model, most companies are good at touting future potential and attracting investors. This leaves little selection for value investors seeking to “invest in what we know” at a discount. Average holding time for one a Lynch investment was 6-7 years, which is how long it typically took for a company to reach its full growth potential, attract the full attention of the investing community, and reach overpriced status. Holding a stock for a long time is a place of common ground for value investors and growth investors, but takes extreme patience. Most investors have a difficult time holding losing stocks, and the volatility that can lead to boom and bust moments for high growth stocks can easily lead to huge losses for investors prone to emotional stock buying and selling, and let’s face facts, that is most of us. Buying companies whose products and services you like is not the only way to “invest in what you know”. Investing in companies or industries where you are a profession expert or you have indirect professional knowledge of can give you an edge. For example, I am a wildlife biologist and environmental impact analyst, and I consult for government agencies and large utilities and infrastructure developers regarding environmental impact avoidance and compliance with environmental laws. My understanding of environmental regulation gives me an edge regarding investments in industries such as solar energy, where solar panel developers may post huge profits in 2015 after prices fell considerably in recent months. The end of tax incentives for solar panel makers in 2016 will lead to increased profit in 2015 because many developers will rush to finish large project ahead of the deadline. My knowledge of environmental regulation and incentives I received from my job gives me an edge in this instance. Anyone can apply this same principle to their own profession and find many great companies that have excellent growth potential and attractive valuations. Closing Remarks I have great admiration for Peter Lynch as an investor, and I believe his philosophy has mass appeal, because it makes investing more personal and can be very lucrative if done well. However, many investors let emotions or naivety get the best of them and invest in what they know with purchases of stocks at the peak of popularity or at excessive earnings multiples and then hastily sell after the stock price drops when the company fails to meet unrealistic earnings goals. Successful purchases of stocks of companies that you like is done when the company is small and growth is ahead of the company, but most importantly before the masses are convinced that the company is the next CMG. Another way to “invest in what you know” is to invest in companies in industries you work in professionally. Knowledge of regulation, new product, successful internal business practices, and other hard to research information impacting companies’ future outlook can give you have an advantage over others. Don’t just look for the easy names of the new hot restaurant or the already established industry leader that commands a rich valuation, and be creative to find names that other investors may overlook or where you may have expert knowledge and information before it is widely known.