Back in June 2013 I argued against buying Tesla (TSLA), the luxury electric auto maker. Since then the stock is up about 190%. Here is the stock price versus the S&P 500:
Although in hindsight it would have been nice to pocket a near 200% return over the past 14 months, I wouldn’t change any of my original negative assessments of the company as an investment prospect. If the bearish take on Tesla is correct, and the stock surge is due to speculators bidding up the price (and doing so during a time of unprecedented market liquidity provided by central banks), there’s an important lesson that follows: just because a stock is wildly overpriced, that fact doesn’t make it a wise candidate for short-selling. As Keynes famously said, the market can stay irrational longer than you can stay solvent. So far short-sellers have been getting crushed by Tesla (although currently 24.84% of Tesla’s float is still sold short). The best course of action with a celebrity stock like Tesla is probably just to stay out of the way.
One indicator that the Tesla stock party might be in its late stages, however, is that some of the heretofore sober commentators have given up tee-totaling, drunk the Kool Aid, and joined the party. Back in February Stifel analyst James Albertine warned against buying Tesla because its “valuation exceeds fundamental reasoning.” Indeed, as Tesla now hovers around its all-time high, it has a forward price-to-earnings ratio of 2,960, according to Zacks, which means you can buy $1 of next year’s estimated earnings for a mere $2,960 today.
Nevertheless, the other day Albertine made a sheepish about-face:
Having defended our more cautious stance for over a year, we find ourselves torn in upgrading as it is clear substantial risks remain … [But] the reality is, [valuation and profitability] issues simply do not matter with respect to Tesla’s stock. Tesla sentiment is like a freight train, in our view, benefiting from a well manicured growth story that has caught the eye of a much broader investor base relative to most auto stocks. Tesla has positioned itself as the smart vehicle of the future, with a glimpse into smart purchasing and smart infrastructure…
Albertine here is sounding more like a metaphor-mixing barber than a stock analyst — freight train sentiment or not, what does it even mean for a growth story to be “well manicured”? The stock market generally is trading at about 17 times earnings, which is a little above its historic average, and within the broader market there still reasonably priced companies. However, examples like Tesla show that there are undeniable pockets of excess as well. The bottom line is that Tesla’s stock is to be avoided, whether as a short or a long.