Tesla Insanity Knows No Bounds

Tesla Spikes 11%

Tesla stock rose 10.8% on Friday which means it’s now up 65.5% since June 12^th. Investors follow Tesla so closely because it is representative of the bubble in growth stocks, particularly in electric vehicle firms. There would be no other way for such a large company to rally so much unless there was a macro situation in play. There is extreme speculation amongst retail investors that has temporarily made many of them rich.

As you can see from the chart below, Tesla’s market cap is up to $287 billion which means it’s worth more than United Health and slightly less than Mastercard. Tesla has a higher market cap than all the car companies listed below combined. Its size in relation to the biggest companies in the world is a bigger deal than in comparison to these car companies because auto stocks usually are cheap because they are capital intensive and low growth businesses. 

For example, in the past 5 years, Toyota only has 10.35% EPS growth. That’s not per year; that’s for all 5 years. That’s why the stock has a PE multiple of 9.3. Plus, most of the car companies carry a lot of debt, while Tesla doesn’t. Tesla can’t afford to carry debt because it’s not profitable without government help. Tesla’s bonds are rated junk.

Tesla is up so much that it is outperforming Microsoft in the late 1990s. From 1998 to 2000, Microsoft stock rose 261% while Tesla has risen 570% in just the past year. That’s over double the performance in half the time. Tesla added Ford’s market cap in 1 day. 

Tesla, Nikola, and Nio combined account for over 30% of the auto sector’s market cap and 43% of the traditional auto stocks. They are more than all American and European car companies combined. That’s even though these startups account for less than 0.5% of cars sold.

On the one hand, these stocks are pricing in growth. On the other hand, they can’t be bigger than traditional firms unless you expect them to dominate a new market. That market is autonomous for Tesla. There is 0% chance Tesla stock is higher 5 years from now if it doesn’t master autonomy in the next few years. A problem with investing based on this is that Tesla has shown no proof of how close it is to get there. 

Elon Musk claims the company will be feature complete for level 5 autonomy this year. That could be wishful thinking. The company will have all the base features, but they won’t work. That’s like if I told you I bought a car, but it won’t drive. It's strongly doubtful Tesla will get to autonomy in 5 years.

Bulls claim Tesla is in the lead, so it doesn’t matter. That’s a mythical lead in a race we have no information on. Tesla has a lot of driver data, but we have no information on how each self-driving company is doing. Autonomy is a huge market, but we can’t invest in a company that might have the lead in a service that will come out in at least 5 years if not over 10 years. 

We don’t know when the service will come out, but we do know it will be in a long time. Some visualize Tesla stock rallying in realistic hopes of autonomy 10 years from now where it finally starts to get close to its current price. This is like how it took Microsoft until 2016 to surpass its 2000 peak.

Nasdaq’s Best Run Since The Late 1990s

Friday was a reprieve for the small cap and value stocks, but the big tech stocks still were up. There was no sector rotation. Both the banks and tech rallied. That’s why the Russell 2000 was up 1.7% and the Nasdaq was up 0.66%. It’s nice to own the Nasdaq since there are virtually no down days. When the market falls, it outperforms. When the market rallies, it outperforms. When the financials do well, it still increases. There is no way to lose.

As you can see from the chart below, the Nasdaq 100 has dramatically better breadth than the S&P 500. 76% of Nasdaq 100 members are above their 200 day moving average which compares to less than 40% of S&P 500 stocks above their 200 day moving average. That’s over a 30% gap which is by far the highest in the past 19 years. 

From September 2014, the FANG+ index has tripled in relation to the S&P 500. If the bottom 100 S&P 500 stocks doubled from here, they would help the index increase just under 2.5%. In other words, they don’t matter.

Value Underperforms

Heading into 2020, value had been underperforming for years. Many smart people were saying value would start to outperform this year. Instead we have seen an exuberant end to the trend of growth outperforming. This is likely the final boost in growth stocks in relation to value.

As you can see from the chart below, the Russell 2000 value stocks have underperformed the Russell 2000 growth stocks by 27% which is the most in at least the last 19 years. Furthermore, small cap value has underperformed small gap growth in 11 of the past 14 years. 

Small cap value is the worst combination for this market because it includes regional banks and small oil and gas companies. Small cap financials had a great day on Friday. KBW regional bank index was up 4.94%. However, that great gain is meaningless in relation to the past few months of weakness.

Conclusion

It’s amazing that we are seeing a tech and electric vehicle bubble during a recession. This is reminiscent of when the fertilizer and oil stocks spiked in 2007. Difference then is they were much smaller as a percentage of the market compared to the large cap tech stocks. 

Amazon, and Apple, and Microsoft are each about triple what Exxon’s market cap peaked at. This is a tech bubble like the 1990s. When Tesla stock falls, it will drop well over 50% in a few weeks.