The Most Dangerous Stock to Own is Tesla

In the course of the preliminary part of the U.S. occupation of Iraq after 9/11, Secretary of Protection Donald Rumsfeld gave a speech to troops. In it, he mentioned:

There are identified knowns. These are issues we all know that we all know. There are identified unknowns … issues that we all know we don’t know. However there are additionally unknown unknowns. There are issues we don’t know we don’t know.

These “unknown unknowns” might have a profound influence on the longer term. However you possibly can’t incorporate them into your decision-making.

This makes unknown unknowns notably harmful to traders. Your portfolio could possibly be crusing alongside properly when all of the sudden one thing occurs that you just didn’t anticipate.

At finest, you may lose some earlier positive factors.

At worst, you may endure an entire spherical journey.

Final week, strategists at Blackstone launched their annual record of “10 Surprises.” These are issues that almost all traders aren’t excited about … however might occur this 12 months.

That gave me an concept.

I’ve lengthy been bearish on Tesla (Nasdaq: TSLA).

Sure, the inventory has appreciated dramatically within the final two years. However these positive factors are purely speculative. They’re not primarily based on a rational evaluation of the corporate’s enterprise prospects.

TSLA is a inventory that’s priced past perfection.

If ever there was the time to overview unknown unknowns, that is it.

A Precarious Place

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Every time I take into consideration an overpriced speculative favourite, I consider the Grinch with all of

Whoville’s toys on the high of his mountain.

Rather a lot can go fallacious in that place.

TSLA is in that place.

Take into account just a few random details:

  • The corporate’s market cap elevated by $500 billion final 12 months. At $800 billion, it quantities to over $1.6 million per automotive offered in 2020. For Basic Motors, that determine is $9,000 per automotive.
  • Tesla is now price greater than Volkswagen, Toyota, Nissan, Hyundai, GM, Ford, Honda, Fiat Chrysler and Peugeot mixed.
  • It holds 18% of the worldwide electrical car (EV) market, however solely 0.5% of the worldwide auto market.
  • The following three firms by EV market share (Volkswagen, BD and BMW) promote as many EVs as Tesla does.
  • The corporate’s elevated gross sales in 2020 have been totally as a consequence of its new China operation. In Europe and North America, its gross sales collapsed by 32% and 38%, respectively. As EV traders know, the Chinese language market is crowded with opponents, together with NIO (NYSE: NIO)XPeng (NYSE: XPEV) and Li Auto (Nasdaq: LI). All these firms are producing autos that value lower than a Tesla.
  • At its present price-to-earnings ratio, TSLA traders should wait 1,767 years to see their funding rewarded by earnings.

I might go on, however you get the image.

Not solely should all the pieces go completely for Tesla’s present plans. Nothing sudden can occur both.

Tesla’s Unknown Unknowns

With that in thoughts, what might upset Tesla’s applecart?

Bear in mind, that is simply hypothesis. Nevertheless it’s knowledgeable hypothesis. All this stuff are completely potential.

  • Congress passes a collection of stimulus and infrastructure spending payments in February and March. Markets react to the expectation of ensuing inflation by promoting long-dated bonds. Rates of interest rise throughout the board, considerably lowering the attractiveness of progress shares, together with TSLA, which suffers a 20% sell-off.
  • A small analysis and improvement firm pronounces a breakthrough that reduces the price, weight and measurement of EV batteries. It seems that the corporate has prior agreements with a number of EV makers, who announce plans to make use of its know-how, dramatically lowering the price and bettering the efficiency of their merchandise. This results in one other important TSLA sell-off. By the tip of the 12 months, Tesla is below substantial stress for market share, particularly in China.
  • Traders pan Tesla’s Battery Day in September, noting that, for the second 12 months operating, the corporate has no important advances to report. As an alternative, CEO Elon Musk doubles down on his plans to deal with lithium mining and manufacturing batteries in-house. Noting the implications for money circulation and profitability — present margins are only one% — traders promote TSLA for one more 20% decline.
  • Regardless of the sell-offs, Musk decides to construct market share by acquisition, launching a bid to purchase Volkswagen. VW rejects the bid. Musk reacts with a collection of more and more unbusinesslike tweets. The Securities and Trade Fee concludes that Musk has violated his settlement with them. Tesla’s board steps in to alleviate him of a few of his tasks. The market reacts with one more sell-off.
  • By the tip of the 12 months, Tesla has misplaced 70% of its market capitalization.

The Greater They Come, the More durable They Fall

Reggae nice Jimmy Cliff made an important level with his 1971 hit of that title.

It’s true. Take a look at this chart of Microsoft from mid-1998 to mid-2000:

MSFT Stock Chart 1998-2000

Throughout that interval the corporate didn’t do something fallacious.

It simply bought caught flat-footed by a bunch of unknown unknowns that added as much as the dot-com bust.

So, as we begin a brand new investing 12 months, it’s the right time to scan the horizon for unknown unknowns in your personal portfolio.

You may wish to begin with positions which have appreciated dramatically in a short interval with out the basics to help that in the long term. Tesla is one instance.

In spite of everything, as Jimmy Cliff sang, “the larger they arrive, the tougher they fall.”

Sort regards,

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Ted Bauman

Editor, The Bauman Letter

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