I don't believe I'm the first investor to learn the hard way; the ins and outs of selecting stocks in hopes of financial growth can be daunting. Some of my early stock purchases were selected with the ever popular "hope approach" to investing. I would buy a stock for a company that I liked and hoped it would do well rather than using sound fundamentals. I was more of a cheerleader pulling for companies such as Evergreen Solar than a wise investor. I've learned over the years that there's a place for rooting, wishing and hoping but that's on Sunday afternoons when your football team takes the field. The wrong time is definitely when you're putting your hard earned money on the line in support of a flawed business.
The number of companies that have entered the market with a novel idea for a product or service and no way to effectively monetize the idea clearly outweighs the number of companies that win that profitability challenge. I'm sure most experienced investors will agree for every Apple there are a multitude of Evergreens. I'm also sure these hopeless dreams have discouraged and chased many new investors out of the market. New investors must also realize that these hard financial lessons are not reserved for small socially or environmentally idealistic companies and flashy software start ups with the latest algorithm. Just ask the many investors that watched their stake in Chevrolet drive off a cliff.
By no stretch of the imagination is there a magic recipe for success. There are plenty of examples of companies that have no hope of ever turning a profit but their stock seems to climb to the stars. There are many other examples of companies that churn out positive income quarter after quarter while their stock price seems to always stay flat. Many times, its the CEO's vision and the story behind the company that is the differentiator. Tesla (NASDAQ: tsla) has a great story and a promise of future income thus tsla continues to drive higher. Many investors believe that story but many don't which is evident by the high short percentage of float. Tesla fits the bill as one of those flashy companies I would have invested in with no regard to analysis. One thing is for certain; a business' stock that only loses money will eventually fall.
Outlined below are the key factors that I follow to help with my selection process. I try keeping this as simple as possible and never get emotionally attached to any stock. As I mentioned previously, no rooting and no wishing. The greatest aspect of personal investing is the evolutionary process involved with learning and developing over the years. A deeper understanding of risk and implications for each and every stock selection becomes clearer as new investors become more experienced. Finding what works is critical. This success plan is different for everyone. For me, keeping the evaluation process as simple as possible is required due to my busy schedule. Keeping it profitable by keeping it SimpliStk.
- Cash on hand and the ability to generate cash from operating income is a big factor when I look at investing into a company. Conversely, a company that burns through cash like its going out of style may offer an opportunity of stock profit on the short side.
- Debt and dilution is an area of concern. A given company might be generating cash flow but could be in trouble if the amount of debt is overbearing.
- Key ratios need to be monitored on a regular basis. Price to earnings is probably the most widely recognized ratio by new investors. I like paying close attention to the price to book. That's where some bargains can be found.
- The CEO of the company knows exactly how the company is doing. I believe that listening to or reading earnings call transcripts is an absolute must. Good CEOs with a winning track record are few and far between especially when it comes to businesses in the infancy stage. A computer programmer with a slick app that'll make dinner reservations automatically when your stomach growls or a doctor that has a promising treatment for pink eye in mice may not be suitable for company leader.
By keeping my focus on these four areas, I have been able to win more times than lose. I also purposely left out specific details regarding each area of focus. As I mentioned above, there is no magic recipe for success. I'd love to say every stock with positive cash flow, no debt, PE ratio between 5 and 12, PB ratio under 1.5 and a rock star CEO like Elon Musk will gain 30% per year, but I can't - it doesn't work that way.
The SimpliStk view of Tesla (NASDAQ: tsla)
- With total cash on hand around $2.39 billion and a current cash burn rate of a few hundred million per year, Tesla seems to be in an okay cash position for the near term. Tesla is in rapid development mode so cash generated from operations needs to be given a slight alibi. Keeping in mind that historical burn rate is not a perfect indicator of future balance sheet cash.
- It appears that long term debt has leveled off around $1.8 billion over the last couple of quarters. There is no apparent reason to dilute shares or add long term debt in the near term. However, if operating income doesn't change significantly to the positive, raising cash will be necessary at some point in the future.
- PB ratio of over 30 jumps out at me and is tough for me to justify. You only need to look at the PB ratios of other auto manufactures where PB ratios of sub 2 are common.
- Elon Musk in my opinion is the story driving Tesla's success. He knows his business and is very confident in its potential. There are no shortages of challenges ahead but Elon Musk makes it very easy to root for Tesla.
Tesla isn't a company I would be willing to jump into at this point but will certainly remain on my watch list. I need to see how Tesla handles the many challenges with production and future competition. The evaluation tells me that tsla will most likely climb over the near term. A solid cash position with no apparent need to take on more debt at this time along with a CEO that continues to drive Tesla forward outweighs lack of operating income and the crazy PB ratio - for now.
Disclosure: I have no position in any of the stocks listed.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.