When we spoke back on Jan 8, I told you to avoid investing in Tesla Inc. (Nasdaq:TSLA) at all costs.
At the time, I was concerned that Wall Street’s hype machine would try to convince investors of a turnaround ahead at the electric-car leader.
You may recall that the market had just turned the corner and was heading into a nice rebound.
That’s exactly the kind of environment those sharpies on the Street like to see when they try to sell you stocks that are dogs.
Make no mistake. Tesla has been nothing short of a disastrous stock this year – skidding by more than 43% as I write this note to you.
No, I’m not predicting that Tesla will go under. But today I want to show you why this is still one of my top stocks to avoid…
Staying Focused on the Investment
Now then, as I have mentioned many times, I’m still a fan of the car company and Elon Musk. Simply stated, Musk is one of the brightest and most dynamic CEOs you’ll find.
His technical vision, bold strokes, and ability to launch a brand new business in a very tough industry deserve great respect.
And if you’ve ever driven a Tesla car, you know just how special a product his firm can make.
Here’s the thing. Loving the car and its company in no way means it’s a great investment.
Of course there are emotional factors at play when any of us buy a tech stock. But in the long run, the way you make money is to remain a focused and disciplined investor.
I use a combination of financial metrics and technical indicators. Tesla was weak on both counts when we spoke last Jan. 8.
In fact, I noted that in the past year, this stock had 11 failed breakouts.
And that’s an important thing to keep in mind because it showed that investors were selling into every rally. In other words, the bears clearly had the upper hand.
We now have nearly six months of empirical data to show that my analysis was dead on the money. The stock has headed straight downhill since.
Now I want to walk you through the challenges that Tesla faces – so you know once again why I feel you simply must avoid this stock.
Here Comes the Onslaught
The fact remains that Tesla is on the cusp of losing its greatest virtue: an utter lack of real competition at the premium end of the electric vehicle market.
Other prestige auto makers, especially those in Germany, have been working hard behind the scenes to roll out a range of “Tesla-killers.”
Consumers who have been thinking about buying a Tesla are now hearing about a growing roster of choices. In fact, the rollout underway now includes:
- Audi’s E-Tron SUV, which began selling this spring. The car maker has already slapped on piles of sales incentives to snag quick market share from Tesla.
- Auto magazines are raving about the new Jaguar I-Pace SUV, which matches up almost spec-for-spec to Tesla’s Model X. And it is up to $10,000 cheaper.
- The all-new Porsche Taycan is already doing hot laps around the famed Nürburgring racetrack in Germany. When it hits showrooms this fall, the Taycan should meet or exceed the performance specs of Tesla’s most advanced cars.
- Mercedes, Volkswagen and Volvo are poised to begin major EV rollouts in the next 12 months as well.
Those auto makers all hold a key strength that Tesla lacks: massive scale. A smaller production base makes it hard to optimize profit margins.
Tesla is poised to make a 15% profit on each car it sells in 2019. Trouble is, Tesla also spends large sums on its corporate staff, marketing and vehicle research, which eats up almost all of its gross profits.
Add in the fact that Tesla must pay nearly half a billion in interest payments on its debt, and you can see why the firm’s cash balances have been falling fast. That debt load has already surpassed $10 billion – and keeps rising.
Lots of debt and a lack of profits are a tough mix to swallow.
Sure, Tesla, can keep raising more money by selling yet more stock and debt. But that task becomes much harder when its stock is no longer so richly valued.
And future loans the firm chooses to take out will carry very high interest rates. Don’t forget that Moody’s has already downgraded Tesla’s debt to B3, putting it at the low end of the “speculative” rating.
Morgan Stanley’s analysts call Tesla a “distressed credit and restructuring story.” Tesla bonds that are scheduled to mature in 2025 now trade for just 82 cents on the dollar, a sure sign of growing concern that the firm can’t meet its debt burdens.
Ample debt and sinking cash levels leads to the greatest problem for Tesla: To buy time, the firm will need to throttle back R&D, which is the lifeblood of any auto maker.
Elon Musk has talked a lot in the past about building a very high-end sports car as well as a radical new trucking platform. He’s not talking about them as much these days now that investors are worried about Tesla’s financial picture.
To be sure, Tesla can look to sell more stock, which has already caused massive dilution for investors in the past. At the end of 2015, Tesla had 128 million shares outstanding. That figure has surged past 173 million-and counting.
A higher share count means that Tesla’s earnings per share will move sharply lower. That assumes, of course, that Tesla grows large enough to become profitable.
While I have great respect for Elon Musk and his technical genius, so many of his firm’s tailwinds have turned into headwinds.
I often say the road to wealth is paved with tech. But it’s vital that you avoid driving quickly in reverse with a stock like Tesla.
A Rare Opportunity
Before I go, I want to remind you about the profit potential behind America’s new cash crop – legal marijuana.
Today, in the U.S. alone, legal cannabis is a $10.8 billion-dollar industry. Worldwide, that figure is $13.8 billion.
But what you might want to ask yourself at this moment is, what will this sector look like tomorrow, as more jurisdictions at home and abroad continue opening their doors to cannabis sales? Not to mention cannabis’ increasing use as a medical treatment.
I’m expecting massive growth. But I’m far from alone.
Grand View Research predicts global cannabis sales will climb to $66.3 billion by the end of 2025.
Right now, large investment firms and members of the Fortune 500 are building up enormous war chests as they prepare to pump billions of dollars into this market.
The good news is that it’s still not too late to get in ahead of these behemoths… and the potential to build the kind of wealth that can last generations.
Cheers and good investing,
Michael A. Robinson