You are the bag holder. That's right. You, the retail shareholder, are the one left with overvalued stocks after the big boys, the institutions, have already started dumping them. The foremost example of this is Tesla (TSLA) . Yes, I was an auto analyst for more than a decade and I could wax poetic about the rise of competition in the BEV space and how the rest of the auto industry - most notably Volkswagen (VLKAF) , as I noted in my RM column on September 24, 2020 - is turning Tesla into this generation's Research in Motion (now known as BlackBerry (BB) ).
I don't care about dogecoin and I haven't watched SNL for at least 20 years, but I do care about ordinary investors, who make up 100% of the client base of my asset management firm, Portfolio Guru, LLC. So you, the little guy, need to watch out when the big guys start to move.
On Tesla there have been two massive examples of this in the past three months Did you notice? It's not that institutional investors are smarter than you, the little guy (believe me, this is not true) it is that THEY HAVE MORE MONEY. Thus when they move, you should pay attention.
Ron Baron of Baron Capital went on CNBC on March 4th and admitted that his firm, an early and enthusiastic backer of Tesla and Musk, had SOLD 1.8 million shares of TSLA. In the same interview he noted his belief that Tesla shares would hit $2,000, implying a $2 trillion valuation for a company that has produced just over $10 billion in revenues in each of the past two quarters. Don't listen to what these people say, watch what they do.
Next, analysis of 13-G fillings showed that Baillie Gifford, an old-line Edinburgh fund manager and another early and enthusiastic backer of Tesla, had sold 11.1 million TSLA shares in the first quarter after selling 7.4 million shares in the quarter prior. In this Citywire story, Baillie Gifford fund manager Gary Robinson noted:
'When a stock has gone up as much as Tesla, the probability that you'd be willing to apply to the outlier case does come down a little bit and you might want to reflect that in the holding size.'
I know these people - fund managers in general, not Baillie Gifford specifically - and I know how they operate. They are not selling because things are TOO good. This does not occur. They are selling because they believe the valuation no longer reflects the growth prospects.
In Tesla's case the reasons are threefold:
- Tesla is getting absolutely blasted by VW in Europe. VW sold about 50% more BEVs on the Continent in 1Q21 than Tesla did. In addition, I believe that VW sold more than 10,000 BEVs in Europe in April, while Tesla delivered about 2,000 cars.
- Slowing of TSLA's growth in China. Along those lines, the CPCA reported this morning that Tesla delivered 25,845 cars in April, a 27% sequential decline from March's China sales level. Tesla sales always decline sequentially after a quarter-end month, but, in this case, the market is remembering that tech companies (as Tesla is classified) are graded on sequential results, not year-on-year. Tesla's sequential growth in global car deliveries in 1Q21 was a minuscule 2%, and I don't see that improving in 2Q, with VW having launched its ID.4 crossover BEV in two configurations (ID.4 X and ID.4 Crozz) in China.
- Tesla is nowhere near a self-driving car. CNBC's Lora Kolodny reported that Tesla management noted in a meeting with representatives from California's DMV that Autopilot is still only Level 2 on the SAE's 5-level scale of autonomy. In that meeting TSLA management had no information for regulators on when Teslas would be capable of full autonomy, or Level 5. In 2019 Elon Musk famously promised that Tesla would have one million robotaxis on the road by the end of 2020. It's approaching mid-2021, and that prediction has yet to materialize.
So, excessive hype leads to excessive valuation. As I noted in my report on Tesla for Sao Paulo-based research house OHM Research yesterday, Tesla is trading at 239x 2021 consensus estimates, while VW is trading at 9.7x. Tesla is far from a start-up, and it should NOT be analyzed as one. It's a mature company, and P/E is a valid way to value it.
Watch what the grown-ups are DOING, not what they are SAYING, and you will save yourself some money.