Like any political tell-all piece this year, this one starts with a caveat: I’m a Tesla (NASDAQ:TSLA) stock bull. In August, I wrote an article anticipating that Tesla shares would rise in the medium-term. The perfect storm of momentum, new car models, and market factors all pointed to increasing valuations.
The stock has since shot up another 180%, proving yet again that you shouldn’t bet against Tesla. But it’s time to take some profits. And here’s why.
- Tesla’s momentum starting to fade
- Valuation will take years to catch up
- Take some profits off the table
TSLA Stock: Running of the Bulls
You can forgive investors for overlooking Tesla in 2020. The electric vehicle maker is on track to deliver just 500,000 vehicles or barely 5% of Volkswagen’s (OTCMKTS:VWAGY) production. And in a year where even a $600 coronavirus stimulus check has taken nine months to pass, buying a new luxury car might have been the last thing on people’s minds.
Yet, 2020 has created a cohort of “Teslanaires” – retail investors who have seen their TSLA stock jump 620% this year alone. It has also developed an even larger group of jealous bystanders in its wake. So, now that Tesla is worth 40% more than all other Western automakers combined, what should investors do?
Here’s what. Firstly, if you DON’T own Tesla: don’t feel like you’re missing out. Vaccine developer Novavax (NASDAQ:NVAX), furniture maker Kirkland’s (NASDAQ:KIRK), and 21 other major companies have all seen even higher returns. Instead, focus your attention on your 2021 portfolio.
Secondly, if you DO own Tesla, then take some profits. Momentum can take you far in investing. But when even the company CEO thinks his share price makes no sense, it’s time to tread carefully.
Valuation Starting to Look Stretched
We investors seem hell-bent on comparing Tesla to the rest of automakers. But that’s like looking at Apple (NASDAQ:AAPL), worth $2.3 trillion, and concluding it’s overvalued because it’s worth three times as much as the other smartphone makers combined. That misses the whole point; Apple’s genius comes from content distribution, not fancy gadgets. And Tesla is far more than an upscale car maker – with self-driving cars on the way, the carmaker could one day become an extension of your living room. (Perhaps later car models will come with a 1-bed, 1-bath).
However, I’m also not a fan of idiotic investing – something Wall Street seems happy to push on us. To come up with a $1,068 price target, respected Morgan Stanley auto analyst Adam Jones had to dream up software and connected vehicle service revenues that don’t yet exist. Could a subscription fee to drive your car be next?
Other analysts have slapped on “buy” ratings even while assigning downside prices to TSLA stock. That’s Wall Street’s great way of reminding us to ignore everything they say.
Cash in TSLA Stock at $900
And that’s why it’s time to start taking some chips off the table. While it’s fun to see your portfolio go up, you also need to think carefully about playing defense.
1. S&P Inclusion Complete. Companies typically see a 15% boost when they get added to the S&P 500 index. On the other hand, Tesla saw a 70% gain as its outsized S&P allocation forced thousands of index funds to buy more. Now that inclusion is complete, TSLA stock will see fewer buyers in 2021.
2. Capital Raise Complete. In December, Tesla announced a $5 billion capital raise, tapping equity markets for more money. Now that the company has enough money to last several years, there’s less need for management to promote Tesla’s stock with attention-grabbing headlines.
3. Stock Split Complete. Tesla’s highly-anticipated 5:1 stock split provided a temporary buying opportunity for retail investors. With shares now sitting at raised valuations, there are diminishing returns even if they split shares again.
4. Pivot-to-Risk (Almost) Complete. Today, spreads between high yield and investment-grade bonds have narrowed back to historical levels. That means less room for institutional investors to move into risky assets.
Value Investing Goes Out the Window
Don’t take this as advice to short Tesla. Picking market tops is tough, and TSLA stock remains a short-squeeze candidate. (That’s when short sellers get forced out of positions, causing a short-term buying bonanza). The company also sits in a pole position to grow in China with its cheaper Model 3 and Y offerings.
The Chinese Communist Party (CCP) has made its green-energy intentions crystal clear and is pushing policies with generous green subsidies. This bodes well for Tesla stock. Despite (allegedly) weakening demand for its higher-end S and X models, the company’s cheaper SUV and sedans have more than made up the difference.
Hold Your Horses
So, why not jump in if you’re not already? Three reasons. First, there’s valuation. Tesla’s 25x EV-to-revenue multiple means its earnings potential will take years to catch up to its share price. Even fast growers like Amazon (NASDAQ:AMZN) saw shares stagnate for over a decade after its initial jump in the 1990s dot-com boom.
Second, there are taxes. It’s worthwhile for existing holders to hang on for tax deferral reasons, but new shareholders don’t have that burden.
Finally, there’s an opportunity cost. There are hundreds of other great investments that don’t rhyme with “Ezla.” From upstart battery makers like QuantumScape (NYSE:QS) to established EV makers like BYD (OTCMKTS:BYDDF), these smaller firms still have 500%-plus return potential in them.
So in 2021, resolve to stop moping that you didn’t buy more Tesla stock. Trading platforms are always too happy to profit from FOMO investing. Instead, look into some long-term growers that could trounce the market for the long term. It’s these gems that will keep your portfolio healthy and let you sleep soundly at night.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.