Rampant speculation and unsubstantiated conjecture have always been a fixture of the stock market. Stock tips, advice, and "groupthink" momentum have characterized a host of publicly traded companies, and this year it looks as though the controversy surrounding Tesla Motors (NASDAQ:TSLA) will be taking the cake, perhaps even surpassing the Herbalife spat between Bill Ackman and Carl Icahn.
In this article, I would like to point out a few flaws in several arguments for and against Tesla, but would most like to reiterate this: nothing can take the place of smart investing, homework, and discipline. If something strikes you as counterintuitive or in violation of basic common sense, it probably is. When the discussion around a company like Tesla reaches a fever pitch, it is important to cut through the nonsense and focus on data, and your instinct that flows from it.
The Shrill Bears
A recent article, claiming to "know" that the stock will crash, typifies the short-sellers and bearish sentiment around Tesla. First, and this will be the case for many commentators and pundits, is the degree to which today's stock market is attributed to the Federal Reserve's policy of fiscal accommodation. Referred to as a "QE-induced bull market," apparently today's market has no redeeming qualities; instead, under this theory which we are supposed to take as the truth, the only reason stocks have advanced is because of "easy money." Unfortunately, this short-sighted premise is misleading, incomplete, and intellectually dishonest.
Although no one would claim the US economy is going gangbusters, it has been very resilient. Shrugging off the ineptitude of any Congressional policy that could help spur job growth (infrastructure, immigration reform, tax reform, etc.), the US economy has nonetheless created over 6 million jobs since the depth of the recession (though still not close enough to the almost 9 million lost). Corporate profits are at or near all-time highs. The unemployment rate is trending downward, from a peak of over 10% to 7.4% today. The housing market has proven itself a steadfast contributor to our economic growth, as rising home values and nearly unfettered demand help homeowners get back to positive equity (this cannot really be understated; a house is often the largest investment any person will ever have, and going from being underwater hundreds of thousands of dollars back to positive does wonders for consumer confidence). Lending, which had become very tight, has been loosening as well.
But where is the attribution to the strengthening economy when it comes to rhetoric on the bull market? Is it really possible that with millions of jobs created, falling unemployment, falling health care costs, and the housing recovery underway that gains in the stock market are only the result of accommodative fiscal policy? Of course not; several aspects of the US economy have been delivering results, and the United States has once again become the most attractive place to invest. Take any unsubstantiated assertion that a stock's gains are solely the result of Bernanke's QE with a grain of salt; the market is too smart for that, and so should you be.
Second, bears like to argue that "a good deal of this move is simply due to market dynamics than to any underlying strength of the business." Another bald assertion with no support, statements like these truly do a disservice to investors. The truth is, no one knows with any real certainty why a stock goes up or down, whether it will continue to do so, or anything else that smells like a prediction. Pretending to know that a "good deal" of a stock's move is for one reason or another is a transparent attempt at sounding official, but really just smacks of irresponsibility.
Finally, and perhaps the most egregious example of robbing investors of any sense of professionalism, the article asserts that after the impending stock crash that will surely occur, you will be left "with losses that will likely not be recovered during your lifetime." How's that for a vote of confidence? I can assure you that the US stock market is dynamic, changing, buoyant, and ultimately rewarding, and you should feel like any losses you sustain can indeed be recovered by disciplined and thoughtful investing. You deserve more credit.
The Self-Congratulatory Bulls
The bulls, on the other hand, tend to give themselves too much credit. Often, they fall victim to an all-too-common mistake: pointing to past performance as an indicator of future returns. True, Tesla has rocketed over 300% this year, and longs deserve credit for making the money they did. However, as many bears will be quick to tell you, duplicating such a start to the 2013 year will be quite difficult. Note I did not say impossible or even unlikely; nobody knows what is in store for the share price of Tesla. The fact is though that the stock has rewarded shareholders handsomely thus far, and to continue to do so at this rate would be unprecedented.
A consideration that bulls often scoff at (no doubt reveling in their own success as a result) is the short interest in Tesla, even in light of the changes in interest over the last few months. The stock price has been on a tear and the daily moving averages are far below its current price; this should frighten longs a bit. There are a lot of traders who are betting on Tesla to lose, and they have recently grown. If future guidance or earnings fail to deliver, Tesla could easily experience a sell-off. That is just the nature of the stock market. To behave as though this possibility doesn't exist is doing yourself a disfavor. Awaiting the updates on the level of short interest in Tesla will be conducive to analyzing a fuller picture of the level of "haters" so to speak, so stay tuned.
Finally, Tesla will have to sell cars, a lot of them, to continue beating expectations. Although bulls seem to ensure that the market for EVs will continue to grow and Tesla will continue to grow market share as a result, it requires a significant revolution of the zeitgeist surrounding cars. Americans are used to gas-powered vehicles, they purchase gas vehicles at higher rates, and gas station infrastructure is steadfast and unrelenting. The US consumer, in order for Tesla to appeal to a larger audience and start selling cars at the pace of other auto manufacturers, will have to be seduced by the appeal of Tesla's electric car. Whether bulls like it or not, this is a necessary and significant cultural change that needs to occur. Sure, it is already underway, as higher fuel standards and the Great Recession have significantly altered oil consumption. This change must continue, and needs to be robust, in order for Tesla to sell more and more of its electric vehicles to a wider audience. The degree to which competition will step in and try to compete as this revolution continues will also threaten Tesla's numbers. It doesn't sell cars in a vacuum.
The cult of personality around CEO Elon Musk will always be a consideration as well; a larger than life type man who generates headlines with every tweet certainly has the power to move markets. His execution and management will continue to be important for the future of Tesla, and Feria believes good management is essential for any budding company like Tesla. Time will tell who was right in the bull/bear fight surrounding Tesla in 2013, but the important takeaway should be what you learned from the story and whether you could navigate the shrill pontifications into profitability, all the way to the bank.
Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.