Is Tesla the canary in the coal mine?
The stunning, violent plunge in the car maker’s stock in the past two days is out of all proportion to the news. It may instead by a signal that this extraordinary eight-year bull market, and especially the boom in so-called “growth” or “glamour” stocks, might be nearing the end.
Tesla TSLA, -5.98% has lost more than $6.3 billion in market value in two days, or more than 12%. Measured from last month’s peak of $383, a stock price at $308 is now flirting with official “bear market” territory — meaning a 20% drop.
The news this week scarcely explains the fall, or anything like it. On Thursday, Tesla’s S car got an “acceptable” safety rating from the Insurance Institute for Highway Safety rather than “good.” And Volvo said Wednesday that all of its new models from 2019 would be either fully electric or a hybrid, underscoring how traditional car makers will increasingly be competing directly with Tesla’s battery technology.
Negatives, sure, but bad enough to wipe out worth 12% of the value of the company?
A likelier explanation lies in the dramatic, manic surge in Tesla’s stock price in the preceding two months, a near doubling in the daily volume of shares traded and a further jump in the record amounts that stock-market speculators are borrowing in order to buy shares across the stock market on margin.
In other words, there’s been a speculative mania with borrowed money, and a lot of gamblers rushed to sell at the first hint of trouble.
At last month’s peak, Tesla sported a stock-market valuation of $62 billion. That’s quite something for a car company that sold 25,000 vehicles in the first quarter — the same time that General Motors sold 547,000. Even today, after the sharp falls, Tesla is valued at more than $50 billion.
Investors typically value stocks as a multiple of the next 12 months’ forecast after-tax earnings per share, but Tesla doesn’t do anything so tacky as make a profit (at least, not by selling cars. It does, however, bring in tons of money selling stocks and bonds on Wall Street). According to Thomson Reuters data, the stock currently trades at 60 times forecasted earnings for the calendar year… 2019.
Elon Musk, the Tesla CEO and founder, is an impressive technological visionary and may yet become the next Steve Jobs. There is plenty to admire. But the stock valuation at this point takes a lot of success for granted.
And it’s not the only stock that does. Memories of the great dot-com, housing and commodities bubbles in the past 20 years have spoiled us for investment manias. Today’s optimism doesn’t come close. But the Nasdaq Composite Index COMP, -0.77% has nonetheless doubled in the past five years. Glamorous “growth” stocks like Tesla — the stocks of tomorrow — have been on fire, and the boring “value” stocks — the stocks of today, if you will — have been left behind.
At this point, the MSCI index of U.S. growth stocks has booked its biggest 10-year outperformance of value stocks since… the bubble of the late 1990s.
There are, at this point, three observations for investors to consider:
First, the bulk of the value of any stock lies in the profits a company will earn 10 or more years in the future. Nobody knows where the market for electric cars will be 2027 or 2037, let alone where Tesla will be in relation. I don’t, you don’t, and Elon Musk doesn’t. And, as the news about Volvo confirms, the more Tesla succeeds today, the more it will attract competitors tomorrow.
Second, that long periods during which growth stocks have beaten value stocks have historically been followed by long periods when it has gone the other way. When growth is on top, it has in the past been the smart move to switch into value (and vice versa). And growth is on top now.
Third, value stocks historically have proven a substantially better investment over time than growth stocks. The glamorous growth stocks of tomorrow have a way of disappointing. For each that becomes Apple, another 10 become Palm or BlackBerry or Nokia.
Indeed one of the better-known studies says that over time, boring value stocks have beaten growth stocks, in aggregate, by more than 7 percentage points a year.
Speculators may still love Tesla. Investors are probably migrating instead to value stocks. And if this week’s reaction is any guide, that may be a smart move.