On July 6, Tesla closed at $308, down almost 20% in just 2 weeks. Sharp drops like this often scare lots of people out of the stock. But one of our top managers, Gorden Lam, is not selling. The best defense against making a bad decision is to take the emotion out of it.
Let’s start by asking if anything has significantly changed for Tesla in the past 2 weeks?
On Monday, July 3, Tesla announced that deliveries for Q2 would fall short of Wall Street expectations due to their inability to produce enough 100 kWh battery packs. Tesla has been ramping up new production lines to make these battery packs and apparently the ramp up did not go smoothly. In spite of this, Tesla still delivered 22,000 cars in the second quarter, 53% more than last year. If you have confidence that they will work out their production problems, this should not be a concern for long-term investors.
Yesterday, July 6, the Insurance Institute For Highway Safety (IIHS) rated the Tesla Model S “acceptable” in the small overlap front test. The small overlap front test is just one of many safety tests the IIHS conducts. It is worth looking to see how the Model S ranked overall before paying any attention to media headlines shouting that the Model S is unsafe.
Last but not least, Volvo announced they are going to be making electric cars prompting Brian Johnson, Barclay’s auto analyst, to tell the Wall Street Journal that “Tesla will face intense competition by next decade from legacy [auto makers] expanding their electric options.”
It is reassuring to hear a Wall Street analyst talk as if he has a 10 year investment horizon. But, in my experience, it is not a good idea to make short term trading decisions based on a 10 year forecast. There are just too many things that can change over that time horizon that can render any trade you make today senseless.
What Should Investors Do?
On June 17, 2016 when Tesla was selling for about $215, Gorden Lam recommended it in The Catalyst For Tesla Is Production. Even after the 20% pullback in the last 2 weeks, investors who took his recommendation are still up almost 50%.
Gorden started his Marketocracy fund in February, 2007. His returns have averaged 11.00% since then, which compares favorably to the S&P 500’s return of 7.57% over the same period. Over the last 10 and 3 years, his performance would rank him in the top quartile of all U.S. equity fund managers. For the first half of 2017, he is up 15.10%.
For those who invested in Gorden’s portfolio, he actually bought TSLA on March 3, 2016 paying $195.72 per share. At yesterday’s closing price you are still up about 57%. Many Wall Street analysts who have been consistently negative on Tesla now have target prices that are above what Gorden paid for the stock.
With stocks like Tesla, Gorden demonstrates that you can't make money following Wall Street's advice. But, if you can identify a good investment and buy it before it becomes fashionable, you can still make money even after the stock hits some inevitable setbacks.
When a stock suffers a bear attack like this, it is best not to get in the way. After Tesla stabilizes, all the speculative value will be knocked out of it. That's when it will be time to buy.