Tesla Derangement Syndrome

I get a lot of questions about Tesla stock recently. I am not a stock analyst and don’t even play one on tv. But I can say that the ones who do apparently are REALLY bad at it. You can pretty much make money on their recommendations using the George Castanza maneuver, whatever they advise, do the opposite. You’ll run about 60% correct that way.

I will also offer a singular note of caution. The NASDAQ is a casino. And the house never loses.

That said, I am actually a very good stock picker. I’m a very bad stock timer. I will see an outcome extremely clearly and with generally 100% accuracy. But I always think it will take two years, and it always takes five. I would make a lot more money in the stock market if I would take long naps, say several years.

Stock picking is NOT good enough. The problem is that you can go along making money in great and easy fashion for awhile, and then a tsunami or market “wind” will hit that has nothing whatsoever to do with your stock picks or their ability to make money. In the 1929 stock crash, Boeing was in the midst of making the equivalent of $100 million that year. Didn’t matter. Their stock got taken out back and shot with all the others. This happened here in 2001 and again in 2008.

So it IS a casino.

Understand too, that my ONLY interest for over 30 years has been tech stocks and particularly high growth stocks. And that is a very very different game than traditional ownership or “investment” in stocks that make money and pay dividends. If you want to run a retirement plan using Utility company stocks that pay dividends, I have no idea what you are talking about.

Tesla’s stock, like all high-tech growth stocks, has been controversial in its early days. More recently, this has attracted a ravening hoard of “traditional” investors who have shorted 30% of the float, absolutely sure that Tesla will fail as an auto company and deeply deeply frustrated because they haven’t been able to cash in. The disconnect is enormous and both they and the financial press have entered a phase now that resembles nothing so much as Trump Derangement Syndrome. I just howled when Judge Piero appeared on “The View” and accused Whoopi Goldberg of having Trump Derangement Syndrome. Whoopi denied it vehemently, cussing and yelling and spitting and foaming at the mouth and threw her off the show and actually chased the good Judge out of the building, proving inarguably that she did NOT suffer TDS and was of course perfectly calm and sane. While hurling expletives and actually spitting on the Judge physically. Wow. She showed her. No Trump Derangement Syndrome here..??????

Morgan Stanley this morning noted genteely that Tesla’s stock was suffering “bewildering volatility” making an investment strategy difficult. The financial press now resembles nothing so much as CNN and MSNBC going after Trump, but they are after Tesla actually mocking the same fake news techniques. And the shorts, in desperate straights from their homes looking out from under the interstate overpass now, have simply come unhinged in Whoopi Goldberg fashion.

From my perspective, both Tesla and Trump are hitting on all cylinders and my only regret is that I can’t actually trade six month call options on Trump. But I CAN on Tesla.

In my world, GROWTH and MARGIN are king. Profits are actually an irregularly necessary evil. Profits cause us to take money OUT of the game and send it to Washington DC, where older wiser people who know what to do with it can actually put it to much better use – like studying whether or not hogs sweat.

So investing in growth stocks is about GROWTH, and any theoretical profits should be deployed to expansion to produce MORE GROWTH. And historically, over the past forty years this is where you get 10x, or 100x, or 1000x and depending on when you get in sometimes 10000x your money.

Ten years ago, in 2008, Tesla had zero sales, zero revenues, and zero profits. Today, 10 years later, they are on pace for $20 billion sales in a single year and 26-30% margin. I like that a LOT because it allows me to dismiss the $20 billion as chump change, and image $100 billion or $300 billion in its place.
And if they do generate a profit, I view that as fudiciary fiscal mismanagement.

Apple Computer WAS a growth stock and traded in and out of that for 25 years very successfully. Today it suffers such eggregious mismanagement that they accrued a ridiculous $250 billion in cash reserves and are paying dividends – a public admission by CEO Tim Cooke that he doesn’t know what he’s doing and can’t imagine where to deploy $250 billion. They very legitimately hit the wall of what I term the law of large numbers – it just takes a shitpot of new business each year to maintain the same percentage of growth as you reach large numbers. And in most cases the only way to shed the cash and continue growing is by acquisition, which is why I advocated they buy Tesla, Solar City and SpaceX over five years ago. Tesla’s blue sky and Musks vision are EXACTLY what Apple needs. And Apple’s deep pockets are what Tesla needs.

In any event, Tesla is expected to announce Q2 results next week and most have them coming in at about $4 billion in revenues – up 45% from the same period a year earlier. And if we throw out all the capital investment required to get there, it is pretty widely accepted that they suffer a margin of 26-30%. At that pace, I would say looking forward we are pretty much assured a base of $20 billion per year and taking the low end of margin. That’s about $5.2 billion cash flow for 169.8 million outstanding shares or about $30.62 per share. Stock price to earnings is historically a 12-13 ratio event. But not in high tech growth stocks. If you’re not a 20 you’re not a player and so I would put fair value on Tesla at the moment at about $612 per share.

Tesla is literally being forced to do a quarter or two of profits to demonstrate they can. This is so idiotic I am embarassed by it. They should plow EVERYTHING back into growth with their factory in China, rollout of Model Y, and Semitruck along with much more aggressive expansion of solar tile roofs and power panel technology. Much like Trump, they have to modify a successful and winning strategy to cater to howling spitting planet of the Apes Whoopi Goldbergs of the world. It is sinful.

But the volatility mentioned by Morgan Stanley is a blessing if you want to do a bit of day-trading using CALL options. I’ve been doing this with September 21 Tesla 400 calls. These option contracts are MUCH more volatile than the underlying stock. Each contract is priced per share but in 100 share contracts. The September 21 400 call gives you the RIGHT to buy a share of Tesla stock on or before September 21 for $400 per share. Now why would you want to do that when it is trading at $308???

Well it’s a future bet. You’re kind of betting that it will be $400 by September first, but the leverage of the bet shrinks with each passing day. So if the stock never changes, it might cost you $4 per share for that option, but it will go down 10 cents per share per day with no change in the stock as we approach September 21. On that date they EXPIRE and are worth nothing.

The contract is for 100 shares, so a single contract will cost you $400 at $4 per share. But if the stock moves just a bit, say to $320, the option might go to $6 – $600 for the contract – a 50% profit from a move in the stock of just 3.8%. This is called leverage. And it is why a trader would do such a thing.

Here’s a look at the last four months of Tesla stock movement.

You can readily see that if I had just bought at the bottom and sold at the top, you could make a fortune in options. I never do that. Tops and bottoms are impossible to catch accurately and people who think they can generally get to sleep in the car with the shorts under the overpass.

Even what I describe is risky. But what I do is chase trends instead of peaks. If the stock turns up and keeps going up for a day or so, I will buy options. Once it peaks and turns down, I want to see it continue down for a day or two then sell. And as you can see in the chart, I did that through about 5 roundtrips in the past few months.

Yes, I would do MUCH better at the tops and bottoms. But hitting them is almost impossible. The trend is your friend. My big score was of course early June. When a stock is moving from $280 to $370 in a two week period, everybody is a stock trading genius. This is a 33% change in stock price. And the $4 option becomes $24. And if you buy 1 contract for $400, you sell it for $2400. And it works better if you have 500 of those contracts.

All the while, several thousand shares of Tesla sit unmolested and unfazed and untraded.

It is gambling. And right when you are really getting into it, a market wind (or hurricane) can blow through and scatter all your chips. So it is of course best to be playing all this with the house’s money in the first place. Don’t use your rent for this. It’s a side game. A side bet. And nothing is assured.

The good money is made on long term investing in a company who’s products you have tested and used yourself, on the concept that others will discover and purchase and use it as well. If you can use the house’s money to do that, you are driving on sunshine – for free.

Long term, I don’t see Tesla as “profitable” for 20 years. But the blue sky in solar, in solar energy storage, in cars, and in trucks, and more generally just in batteries, is simply enormous. There is room to grow right into the law of large numbers into some pretty DAMN large numbers. Ergo my $1500 per share call on Tesla common stock by February 2023.

Musk himself has acknowledged that the Model 3 rampup is the last “bet the company” move they’ll ever have to make. And it probably was just that. They did it with the Roadster and with the Model S, and now with the Model 3. Model Y, semitruck, Tesla Pickup, will all be more on the order of the Model X introduction – not a particularly risky period for them. And going forward, they can do it out of revenues, out of further capital investments which should be ready willing and able, or any combination of the two. I look for big things with the addition of the Shanghai factory and probably a European facility as well. And I would be astounded if that $20 billion was not at least $100 billion by February 2023.

There are a couple of other intangibles I am very encouraged by but just not able to price in. Tesla, much like BYD, has reached a critical mass of just raw engineering talent. I’m talking about just a body count of really smart young people with a good education in the fundamentals of electronic design, software, and materials who want to change the world. That critical mass becomes an attraction in its own right and the rich keep getting richer. If you are a top engineering graduate from MIT, Rensselaer Polytechnic, Stanford, et al and you don’t already KNOW that SpaceX or Tesla is the top place on your list of dream jobs, you need to go on to more graduate work. And probably some psychiatric testing.

For the foreseeable future, Musk gets to pick from the best of the best. And he actually doesn’t care where you graduated from or if you ever graduated anything. That raw body of engineering talent and creative young minds becomes an asset all on its own. And if you go to Freemont and get on that team, and get used up, overworked, burnt out and thrown out, you’ve just had the best experience that is available for money and the rest of your life will be easy by comparison and no company anywhere will ever turn you down unless you are a serial killer with a Turban who sleeps with Whoopi Goldberg and eats Thanksgiving at Maxine Watters house. Some will give you a trial start even then.

And ever lurking on the horizon is autonomous driving. It’s a seven TRILLION dollar siren song. I don’t believe in it. But it’s not my job to pee on people’s dreams. I would predict that if it can be done that’s where it will be done, because Musk wants it SO bad…

Finally got my SUMMON mode for Model 3. Lame Elon…just lame….

Jack Rickard