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Window dressing is when portfolio managers pick up stocks that have performed especially well just before the close of a reporting period. Likewise, they may dump losing stocks, especially high profile losers, before the close of a reporting period. In so doing, they can show a high profile winner and do not have to show losing securities on their financial statement of holdings. So when Joe Investor receives his statement showing him what his hired portfolio manager found savory, he does not see that stink of a name everyone hates on the list but does see that big name winner everyone loves, like say, for instance, Tesla Motors (NASDAQ:TSLA). That makes for a reduced possibility of Joe liquidating his stake in the mutual fund or other portfolio. In turn, that means the portfolio manager will not lose his management fee from those assets under management, and so he has some incentive or perceived incentive to act in this way.

Chart forTesla Motors, Inc.

Chart at Yahoo Finance

But as the turn of the quarter comes, a portfolio manager's value minded conscience may weigh on him with regard to his stake in stocks some might consider expensive, like Tesla or LinkedIn (NYSE:LNKD). For that same reason, he might pick up names he had avoided showing in his portfolio, like say Apple (NASDAQ:AAPL) or Facebook (NASDAQ:FB). I would call that "window undressing," and I see Tesla at risk here because of it.

Tesla ran to over $107 through the last week of the quarter and marked a gain of 9.8% in June alone. Might some of that have come on window dressing, and might it now come undone by window undressing?

Despite my favor of the relentless Elon Musk and his visionary and effective solution to the combustion engine, Tesla Motors is not a value stock story today by most standards. Some would argue it's expensive even on a growth at a reasonable price (GARP) basis or by looser value standards. The stock trades at 125X the analysts' consensus EPS estimate for 2014 of $0.86. That alone does not make it expensive, but when comparing the value to the 33% long-term growth expectation analysts have for the stock, it looks increasingly that way. The PEG ratio on these factors is 3.8X.

Now supporters of Tesla would argue that the stock will grow even faster over the next several years and so deserves a premium valuation, and certainly, the $0.86 analysts expect the company to earn in 2014 contrasts greatly to the per share loss of 11 cents analysts see for 2013. Still, there is one red flag arguing against this position, and it's the fact that the 2014 consensus estimate is drifting downward, from $1.30 90 days ago. Normally, I would like to see an estimate increasing to support a momentum argument. We could then say that estimates may be understated; but when they are coming down, we simply cannot say that.

So for a stock benefiting from momentum and popularity, a portfolio manager has incentive to include it in his holdings when he reports to his investors. However, given valuation and the potential that others like him might divest of the security after the reporting period is closed, thereby driving it lower, he also has incentive to hedge his position or divest it in order to focus on what matters most to his investors, performance and wealth creation. So even while I like Musk and Tesla long term, I see some risk in the shares over the short term and would recommend investors protect some capital and take some profit off the table, at least temporarily. For that same reason, investors might consider a pair trade involving the purchase of Apple, which could benefit from "window undressing" here, and sale of Tesla, which I believe faces relative risk.

Source: Tesla May Be Undone By Window Undressing