So Saul, why did you sell Tesla?

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So Saul why did you sell tsla?

Hi Everett,

First of all let me make it clear. I love Tesla, the company. I love what they are doing. I hope that they succeed. If I lived all year in one place I’d probably buy a Tesla car. I greatly admire Elon Musk and think he has great charisma as well as a mission and great ideas.

So why DID I sell Tesla?

Okay, first of all and primarily because they stock is wildly priced. Agreed? And I think that the chance of them growing into the stock price anytime in the next five years, at least, is nil. Why? Because they are in the car business. What’s wrong with that? The car business is very capital intensive. If a software company doubles its sales it just prints twice as many copies, or lets people download them. A car company has to build a new factory, stock it with equipment, hire new employees, etc. Ambarella, and similar companies, come out with many new products a year. No problem. If Tesla wants to come out with a new model it’s a multiyear project with an enormous amount of capital expense. Yet Tesla is priced like a software company, not like a successful car company. This was my main reason.

Second, I think Elon is on a mission to change ICE cars into electric cars. That’s not necessarily good for Tesla, the company. Giving away all the patents for free will help his mission, but possibly hurt his company’s competitive position.

Third, the amount of capital expense in setting up the battery megafactory will be enormous. The below is abstracted from an article on Seeking Alpha written in June:

How not to write a TSLA short article

Summary
There are valid issues to warn Tesla investors about, but the issues usually discussed by shorts lack credibility.

Deliveries do not equal demand. Alleging demand shortage is not credible.

Tesla has established higher-than-industry standards for quality, safety, reliability and customer satisfaction. Alleging any such product shortcomings is not credible.

Even Tesla shorts don’t seem to have grasped how big a build-out Tesla has ahead of it and the implications for future spending and profitability.

There are reasons to warn investors away from investing in Tesla, or at least knowing what they are getting into, but the prevalent reasons repeatedly expressed are not among them.

Tesla short authors need not bother trying to convince Tesla buffs that deliveries equal demand. It is well known that demand exceeds supply and will for the foreseeable future. Tesla doesn’t advertise. It has no need to. Word of mouth is sufficient to keep the queue full. Tesla still has markets it hasn’t entered with the Model S, and the Model X is only about 3 quarters away from its first deliveries. The Gen III is the mass market car that everybody’s been waiting for, and it will be coming in another two or three years. It will increase Tesla sales and capacity tenfold. The Fremont factory will be humming at full blast for as far into the future as projections can reasonably be made.

Tesla short authors need not bother trying to convince us that Tesla Model S suffers from fatal design flaws or execution problems on the production line that would result in higher than normal service rates or safety problems. Safety was the foremost in the design at every step. Tesla is consistently rated highly by the NHTSA, Consumer Reports, and every other objective auto testing magazine or report. It doesn’t matter whether it is safety, reliability, quality, or sheer joy of driving, Tesla consistently rates high on all objective scales, and it is an insult to our intelligence to tell us anything contrary.

Tesla short authors need not bother trying to convince us that a Model S is somehow not green. Compared to what? An ICE vehicle? Get real! Telling us that a Tesla runs on dirty old coal is stupid. Even running on electricity from a 100% coal-fired grid, a Tesla is cleaner in terms of emitted CO2 than an ICE vehicle. Get outta here! Are there potential environmental problems with manufacture of lithium ion batteries? Undoubtedly, if the manufacturer is not careful to source battery components and minerals responsibly. But I’ve seen nobody able to prove that Tesla sources its components irresponsibly. And Tesla has made clear that the gigafactory will be built responsibly and use responsible sources. It will also recycle old battery packs.

All that said, what should Tesla shorts concentrate on?

How about the ramp-up problem? Tesla is still in its infancy, yet it has a market cap of a company many times larger than it currently is. As of today, it’s at $28.49B. By comparison Toyota is listed today at $187.36B. So Tesla is valued at 15.2% of Toyota. If we project forward to the end of the year, Tesla will be producing cars at a rate of 50K units per year. Toyota on the other hand produces cars at the rate of about 9M units per year. So Tesla will soon (end of 2014) grow to produce at the rate of .555% of Toyota. That’s not even 1 full percentage point of one of the major manufacturers yet. Why do I pick on Toyota and not GM or Ford or Chrysler? Because the Detroit Big Three have had huge problems that may be negatively impacting their valuations. Also, because at 9M units per year, Toyota is conveniently about one tenth of the entire ICE auto industry.

Tesla is just now ready to break ground on its first gigafactory intended to make 500K battery packs when running at full capacity by the end of the decade. It has borrowed over $2B of the $5B cost to do so, and expects another $3B to come in from other partners, most notably Panasonic.

Yet Tesla must grow the rest of the company tenfold in order to take full advantage of this capacity. Remember, they will only be able to build cars at the rate of 50K units per year at the end of this year, and they will need the capacity to build at the rate of 500K units per year to match the gigafactory. I have no doubt that the company will grow that much, but it will come at a cost in terms of capex, R&D, and other expense expansion. Just to spend the $2B that has been already borrowed over the next ten quarters will put the company in the red to the tune of $200M per quarter. Investors should not be expecting Tesla to show solid, consistent, GAAP profits any time soon.

Having seen what one gigafactory will do to Tesla profits for the next 10 quarters, here’s some more news that should be of interest to Tesla investors and shorts alike: The gigafactory is expected to be only the first of many. Those extra foundations that are being poured in all likelihood will get used later. Even to grow Tesla to its current valuation of 15% of Toyota, Tesla will need not one, not two, but three gigafactories.

But Tesla surely has much bigger ambitions than that. To grow to the full size of Toyota will take 20 gigafactories, considering that it will take at least a decade and half to do so and in that time Toyota will surely have grown as well. And as noted, Toyota is about 10% of the ICE auto industry, and it’s Tesla’s stated ambition to completely convert the entire auto industry to “sustainable transport” (all electric vehicles). That means, if Tesla is providing battery packs for the entire industry, that they will need 200 gigafactories. Now add in however many additional gigafactories you think SolarCity will need to supply stationary storage capacity to the solar power industry. Just consider the enormous implied capex that would entail.

In short, there are real issues that shorts can address with Tesla articles, but do not insult our intelligence with articles that rely on innuendo and falsehood when there is real substance to be discussed.

I want Tesla to succeed, I just don’t want Tesla investors to fool themselves into thinking that profits are in the immediate future for this company.

Now I agree that this may well be a short article in disguise, but a lot of it sure makes sense, doesn’t it?

By the way, I never have, and never would, ever short anything, as I am scared by the potential for unlimited losses. But even Elon Musk has said over and over again that the stock price is way too high for the current reality.

That’s why I sold out of TSLA.

Saul

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Thanks again Saul. Many good points in your answer. I have’t bet the house on this one. Just the garage.

Robert

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Saul those are the most sensible reasons for not owning TSLA that I have ever read. And so succinct.

Bravo.

My only quibble would be that as long as regular auto companies are growing at 2% , if that, and Tesla is still growing faster, it will deserve a higher P/E. And then there is the stationary battery business which people at Tesla think will be as big as the auto business.
I suspect both will be doing fine in 5 years but of course that is only a guess.

I own TSLA but have not been a buyer for quite a while. Company news just gets better and better, but the stock is not responding. There is a reason, either I am wrong about company news or the market either disbelieves the news or no longer considers Tesla a growth company.

Either way ,best not to fight markets. I am very careful about averaging down .

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My only quibble would be that as long as regular auto companies are growing at 2% , if that, and Tesla is still growing faster, it will deserve a higher P/E.

So it’s way overvalued and once (if) it get’s to the point where it’s selling as many cars as a traditional company then it’s growth will surely decline and with it it’s deserved P/E too.

I own TSLA but have not been a buyer for quite a while.

So you’ve made a killing on the stock but you now hold a widely overvalued stock.

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I own TSLA but have not been a buyer for quite a while. Company news just gets better and better, but the stock is not responding. There is a reason, either I am wrong about company news or the market either disbelieves the news or no longer considers Tesla a growth company.

Stock prices have a life of their own quite apart from the company they represent. They don’t always react to news specially if the news are in fact olds, just confirmation of previous news.

After a furious rise it is normal for the market to take some time to digest the gains and to create a base for the next rise. Say a stock goes from $10 to $50, the guy who didn’t buy at $10, or $20, or $30, or $40 won’t buy at $50 but if the stock stays at $50 and the good news pile up, in time $50 won’t look so expensive and the next run up will start.

I’m having similar thoughts about KNDI although the ramp-up situation is different. They should have the capacity to build 500,000 cars in under five years and they will be making many more models than Tesla, some for rent, some for government and some for higher income buyers and for export. But just as Tesla, they make cars, not consumer electronics.

Denny Schlesinger

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So you’ve made a killing on the stock but you now hold a widely overvalued stock.

You haven’t made anything until you sell.

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So you’ve made a killing on the stock but you now hold a widely overvalued stock.

You haven’t made anything until you sell.

If you word it a little differently, the solution may become obvious. How does this sound?

I have a huge paper profit on a wildly overvalued stock.

What solution jumps to mind?

Saul

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What solution jumps to mind?

Stated that way, the obvious answer is to sell … but if the stock is going to continue to grow substantially, selling merely means that one doesn’t own it anymore when that growth occurs.

It seems to me that TSLA has some huge growth potential, even considering all the qualms that have been expressed. Had I bought it when it was much cheaper, I would be quietly waiting out the recent declines without excessive concern since it would still be a high conviction stock for me. Having not bought it earlier, the question is how cheap can I buy it? I don’t want to miss the opportunity of the current dip, but at the same time I don’t want to buy and then have it immediately lose 20+% of value … been all too much of that.

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What solution jumps to mind?

Saul

What solution do you want? LOL

Denny Schlesinger

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What solution jumps to mind? Saul

What solution do you want? LOL, Denny

Denny, I didn’t propose the problem. I was presented with this problem “So you’ve made a killing on the stock but you now hold a wildly overvalued stock” in the abstract. So I reworded an abstract problem in this way “I have a huge paper profit on a wildly overvalued stock” to make an obvious common-sense solution stand out, without referring to any specific stock or company at all. It would be a good solution whatever the company. Not necessarily the only solution but, given the hypothesized problem the person was presented with, certainly a good one (maybe the stock would keep going up into even more wildly overvalued levels (or maybe not), but you don’t have to hold every stock that goes up, and you don’t have to worry about the stocks you’ve sold, just the stocks you still own or have put the money in).

Best,

Saul

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I did sell a little TSLA. But kept most of it because this is a 5 or more year investment for me. It was that way from the first share I bought.
I’ll know then whether I was wrong or right to hold most of my investment. I can afford to wait.

Probably my biggest investment mistakes have been selling great companies like Apple too soon. But that’s just me.

Selling can involve some subtle problems. You have to know when to sell, how much to sell,what to do with the money after that sale. and when /what price to buy back.To some extent these are serial decisions, screw up one and all are screwed up…

Re capital - Yes the auto business is capital intensive. But Tesla got it’s factory for pennies on the dollar, and so far it’s capital has been very cheap, half or less what other car companies pay. And the GF is using money from Nevada and Panasonic , not just Tesla. Tesla is expanding for the future like Amazon. And like Amazon could make more profit anytime it wants so P/E may be less important as a gauge of proper stock pricing.Whatever, the up momentum is gone and the price seems to be headed downward. Apple did the same, now it’s back up.

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I’m sorry you missed the old joke about hiring an auditor, the one who replied “How do you want your accounts to come out?” got the job. LOL

I followed the thread just as you describe and your reasons for taking your TSLA profits are sound indeed.

The question “So you’ve made a killing on the stock but you now hold a wildly overvalued stock” has a snide quality to it but it does pose a fundamental dilemma: “To take or not to take profits.” My experience is that there is no certain answer, some stocks come crashing to earth while others continue to soar. The only guide is to follow the story (not the stock price) as a “reliable witness.” If you are in love with your stock that is impossible. Detachment is required.

Taking profits is a safe maneuver but not necessarily the best one. If the stock crashes you congratulate yourself but if it continues to soar greed gnaws at you. One (poor) solution is to stop tracking the stock’s price but that is just putting your head in the sand, not a real solution.

Holding on is the same problem in reverse but you wind up poorer if the stock crashes.

My solution is to split the position into two parts, a core holding and a trading lot (about 1/3 of the position). On the way up you trade to improve your cost basis. Once the perceived “dilemma” point is reached, the trading lot becomes the take profits lot. When you come to the fork in the road, you take it… both ways, sell some, hold some.

I’m having this issue with Kandi, I’ve made a killing (about a 7 bagger just now). But, is KNDI now wildly overvalued? The story is on track just like Tesla is on track, but the stock hit a bump in the road creating the dilemma.

I Shoulda, Coulda, Woulda… darn!

Denny Schlesinger

BTW, I made some back of the envelope calculations about the future price of TSLA. While it’s not “wildly overvalued” it does look “fairly valued” which means it might not be providing market beating returns. Because of the discounting nature of the market, the big profits are going to those who bought cheaper earlier but at greater risk.

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Because they are in the car business.

A good argument could be made that they are actually in the energy business. Given that concept, giving away their patents is a brilliant marketing and business move. It allows them to do good while doing well. It encourages others to also build electric cars, hopefully using Tesla technology while they will also hopefully use Tesla batteries. They will also have already built out charging stations all around the world. These stations are free for Tesla owners providing another incentive to own a Tesla car but they will not be free to the users of competitor’s cars. Their research into energy storage is intense and ongoing. The possibilities for energy storage for things other than car batteries is there too. For now, cars is just a vehicle (pun intended) for research.

So I would agree, as a car company, even discounted 25% from its high, Tesla the stock is probably very overvalued. But as a car and energy company? The sky is the limit (and that would be if you ignored Elon Musk’s interest in outer space).

Put differently, it would be like evaluating Amazon.com in the mid to late 1990’s only as the world’s largest bookstore. No doubt Tesla stock will be very volatile in the short term. But it has the potential at least to be one of those stocks that you look back on wistfully and say “if I had only known…”

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Sorry, couldn’t help reposting this with proper formatting. I wish there was the ability to edit your own posts for just a short while on this site.

Because they are in the car business.

A good argument could be made that they are actually in the energy business. Given that concept, giving away their patents is a brilliant marketing and business move. It allows them to do good while doing well. It encourages others to also build electric cars, hopefully using Tesla technology while they will also hopefully use Tesla batteries. They will also have already built out charging stations all around the world. These stations are free for Tesla owners providing another incentive to own a Tesla car but they will not be free to the users of competitor’s cars. Their research into energy storage is intense and ongoing. The possibilities for energy storage for things other than car batteries is there too. For now, cars is just a vehicle (pun intended) for research.

So I would agree, as a car company, even discounted 25% from its high, Tesla the stock is probably very overvalued. But as a car and energy company? The sky is the limit (and that would be if you ignored Elon Musk’s interest in outer space).

Put differently, it would be like evaluating Amazon.com in the mid to late 1990’s only as the world’s largest bookstore. No doubt Tesla stock will be very volatile in the short term. But it has the potential at least to be one of those stocks that you look back on wistfully and say “if I had only known…”

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Put differently, it would be like evaluating Amazon.com in the mid to late 1990’s only as the world’s largest bookstore. No doubt Tesla stock will be very volatile in the short term. But it has the potential at least to be one of those stocks that you look back on wistfully and say “if I had only known…”

Hi Alan, Apparently you are too young to remember. Amazon hit a high in Nov 1999 (as you pointed out) and then fairly rapidly lost about 93% of its value. That’s a 93% loss! That means every $100 became $7! It fell to about 7% of what it had been at the peak!

It took 8 years, until July 2007, to come back to where it had been in 1999. But that only lasted a few months. Unfortunately, the big recession hit and by Oct 2008 it was back to less than 50% of what it had been in 1999. It finally passed that 1999 peak for good in late 2009. That’s almost 10 years to wait, and when your investment was down to 7% of what it had been, you wouldn’t have felt so good. And that was 10 years of wasted opportunity. And we’re not figuring in inflation, or 14 years of discounting back, and all the rest.

And you are picking Amazon. MOST other high flyer internet stocks that people said the same things about at the time went bust, and even familiar ones like Yahoo NEVER came back. Yahoo’s high in 1999 was $108 (it was the google-equivalent search engine at the time). In 2014, it’s finally come back to $50.

Don’t count on time always rescuing you from a ridiculous evaluation.

Saul

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Sorry, couldn’t help reposting this with proper formatting. I wish there was the ability to edit your own posts for just a short while on this site.

Ah, but there is!

Instead of hitting “submit message,” select “preview message” instead. You will be able to see exactly how your post will appear, and if anything is amiss, you can go back via “edit message” and correct whatever it is that needs fixing – be it spelling, grammar, or formatting (or even adding/deleting a thought). You can repeat that sequence as many times as needed to get all the bugs out. Once you’re satisfied with it, then you can hit “submit message” and be much happier with it. For instance, thanks to some weird auto-corrects on which my tablet insists, along with adding/deleting a sentence or two, I’ve made more than one correction to this post.

I use it all the time. I’m a fairly good editor, although mistakes still get by me now and again – but far fewer than would occur if I didn’t do so.

Hope this helps.

Best regards,
Kathie
(Saul’s board lurker) :o)

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Hi Alan, Apparently you are too young to remember. Amazon hit a high in Nov 1999 (as you pointed out) and then fairly rapidly lost about 93% of its value. That’s a 93% loss! That means every $100 became $7!

Ha, I wish! I picked Amazon precisely because of its volatility. I bought Amazon early and experienced both its fall and rise again. A small % of that initially relatively small investment paid for an entire kitchen remodel (we call it the Amazon.com kitchen). The rest fell to earth and slowly climbed back and has been a roller coaster ever since. The point is few people know when it’s the right time to sell and buy back in. Those studies are done and the results are spectacularly clear. Netflix is another terrific example. So I’ve bought in to the idea totally to just sit tight. Keep enough in reserves so I can live 5 years without selling any stocks and then just leave my cott’n pick’n hands off because in my efforts to time the market or individual stocks I’ve noticed that I’m perfectly imperfect. The market always falls when I buy and rises after I sell. So I buy slowly into really good companies and leave the money alone, in good markets and bad. Then I let the magic of the market do its work. That approach has worked for Warren Buffet and it’s good enough for me.

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." The market always falls when I buy and rises after I sell. "

And I thought that I was the only one :slight_smile:

Keep your winners, sell your losers doesn’t mean that you keep winners forever, since except for utilities most companies fail eventually.
But a few weeks or a few months is not long enough in most cases to see how a business works out. Again Apple as an example. As far as I could tell at the time and afterwards, there was zero change in Apple’s business during the period when it fell from 700 , split, then rose again. The price fluctuation was a result of changes in perception, people cashing out at a profit etc. Not the business, which was doing fine.

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So I’ve bought in to the idea totally to just sit tight.

Hi Alan, I understand that point of view and it certainly is an alternate way of doing it. The Gardners’ point of view is that if you buy the same amount of four stocks and three go to zero, the one that is a 5-bagger will make up for the losses. That works in theory, but in the real world I think it doesn’t work at all, because the ones that go down keep sopping up more and more percent of the total investment as people “double down”, “reduce their average cost”, “buy at better value points”, and generally put in more and more money in at lower and lower prices. For example, on the WPRT board, when the price dropped from $32 to $25 lots of people felt it was a bargain, and bought more, and at $20 doubled down, and doubled down a second time at $15, etc. It’s hard for people to see a stock they believe in go down to what they think are ridiculous levels without buying more (it’s at $3.62 as I write) which is what’s wrong with the Gardners’ hypothesis. Unfortunately, people with 3 stocks that went to zero and one that was a 5-bagger, probably ended up with having put much more into each of the ones going down than into the one that went up. JMO. I’ve done it myself but try now not to.

Saul

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…but in the real world I think it doesn’t work at all, because the ones that go down keep sopping up more and more percent of the total investment as people “double down”…

Saul, on this point you are exactly correct. If you keep putting good money after bad it sucks you dry. The Foolish but completely counter-intuitive way is to put more money into stocks that have done well but still have a great story. Mastercard comes to mind.

The best reason I can think of for why this works has to do with company culture and leadership. These are A+ cultures run by A+ leaders. Think back to your school days. Were the students that scored straight C’s “due” for an A or a B? Were the straight A students more or less likely to keep doing well?

I don’t hold stocks forever. I sell when I need the money, the underlying story has changed or, to rebalance when a stock has totally unbalanced my portfolio. For me that is somewhere in the neighborhood of 12 - 15% depending on how adventurous I’m feeling. That has allowed stocks like Netflix, Mastercard, Tesla and lately Facebook to grow unfettered from my meddlesomness nature. It is not nearly as much fun as trading but for me it has been more profitable.

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