Tesla, led by celebrity-CEO Elon Musk, has seen its share price climb from $361 on March 18 to an eye-watering high of $1,546 on July 15.
Along the way, the company has been forced to shut down its factory. Musk has threatened to move the factory out of California. The prices of some of its models have been slashed due to a lack of demand. Also, deliveries last quarter were well below projections (but above Musk’s walked-back estimate).
And yet, the share price climbed 328%., making Tesla the most valuable car maker on the planet.
That has at least one longtime observer saying the stock is in a bubble and it will burst soon.
Mark Hulbert, a regular columnist for MarketWatch and the founder of the Hulbert Digest, said in a recent article, “Tesla is a bubble that is going to pop.”
Hulbert points out a study by three Harvard researchers that the more a stock has gained over the recent past, the greater the odds of a crash. With Tesla outpacing the S&P 500 by 324 percentage points over the last two years. Based on the Harvard study (which stopped calculations at 150 basis points) there’s a greater than 80% chance that Tesla’s stock will drop by at least 40% in the next two years.
But those aren’t the only headwinds facing Tesla right now.
Michael Brush, publisher of the Brush Up On Stocks newsletter, says there are seven risks for investors in Tesla right now.
Risk #1: The stock price has gotten too far ahead of fundamentals
Tesla trades at 7.8x forward 12-month revenue, says Todd Lowenstein, an equity strategist at The Private Bank at Union Bank. Compare that to around 0.2 or less for General Motors and Ford, who produce millions of more cars than Tesla every year.
“Tesla strikes me as more speculation than investing at these prices,” says Lowenstein, “It’s pricing in not only massive market-share gains and flawless execution, but world domination.”
Robert Bacarella, who manages the Monetta Fund, added “The stock is not trading on a multiple of today’s or tomorrow’s earnings. It is trading on a multiple of Elon Musk’s dreams.”
Risk #2: Tesla raises more money
With the share price in the stratosphere, it’s widely expected that Elon will raise more capital to shore up the balance sheet. Depending on how much money he chooses to raise, and at what price, current shareholders could be heavily diluted.
Risk #3: The Electric Vehicle market is in a bubble
“We are in a hot market right now,” says Shawn Kim, a research analyst at Gabelli Funds. Kim also thinks several of these companies are just speculative bets. “There is a bit of exuberance in the sector.” If the EV bubble pops, Tesla goes right along with it.
Risk #4: Tesla needs to execute flawlessly
Tesla is forever running around putting out fires. The Chinese factory was reportedly shut down for a while because it ran out of parts to build cars. Additionally, owners have reported missing parts of mismatched parts after taking delivery. But it might be Musk’s promise of “Level 5” autonomous driving that might knock the company down.
“Autonomous driving is one of the toughest problems in artificial intelligence,” cautions Kim. “Maybe Musk is not that close, because it is such a difficult problem.”
Risk #5: S&P 500 inclusion is priced in. What if they don’t get added?
A lot of investors have piled into Tesla thinking it will get a boost if it gets added to the S&P 500 as index funds will have to add it. The idea has been discussed so much it is probably priced into the stock, says Kim.
Risk #6: The overall market feels ‘toppy’
If the tides change and suddenly the market starts dropping, “frothy” stocks like Tesla will get hit hard.
Risk #7: Musk’s hubris
Musk recently announced that Tesla would sell “red satin short-shorts with gold trim” to mock the short-sellers betting against the stock. That’s typically not a good idea and shows too much hubris.
US Auto Sales Picked up in the 3rd Quarter
It’s still a long road to recovery, but the road trip already started. The U.S. automobile industry reported that auto sales picked up in the third quarter. Now, US auto manufacturers are rushing to build more cars and refill inventories. Total auto sales remain lower compared to the same time last year. But analysts noted that the selling pace in September neared 2019 levels. Compared to near-zero sales earlier when the pandemic hit, this is a godsend.
At the forefront of the resurgence are trucks and sport utility vehicles. Both are making a strong comeback in increasing numbers. Add a growing trend of urban residents who are now buying cars again. These are the ones who used to commute due to traffic and distance. With coronavirus-threatening commuters riding mass transportation, cars are now a safer option.
GM, Chrysler Sales Picking Up
Edmunds.com said that while the US auto industry remains down, it’s still way better than April-June. The car buyer website says that the total industry is down 11% this past quarter. While still negative, this is a big recovery from the 31% loss in the 2nd quarter.
General Motors Co. reported that its 3rd quarter U.S. sales is down almost 10% compared to last year. During the previous quarter, the company suffered a 34% drop. All its US factories shut down due to fears of coronavirus infection. Today, production returned to its pre-pandemic rate. Pre-corona cost-cutting measures and demand for large pickups helped boost profits.
Fiat Chrysler Automobiles reported a similar 10% drop in the same period. For the June quarter, it reported a 39% decrease in sales. Others such as Ford and Tesla have scheduled their sales reports later this week.
Among the imports, South Korea’s Hyundai Motor Co. reported that its U.S. sales increased 5.4% in September vs 2019. Sales dropped only 1% in the third quarter. Toyota’s third-quarter U.S. sales were down almost 11% over the same period. The company posted a 16% gain in September, thanks to its Rav 4 and Highlander SUVs. Honda Motor Co’s third-quarter sales fell 9.5%, but it reported a similar 12% spike in September. Nissan, which relies on fleet purchases, said its sales were down 32% during the 3rd quarter.
Factory Shutdowns led to Higher Prices
The coronavirus pandemic shuttered manufacturing plants and sent workers home. Factory shutdowns earlier this year limited inventory. Instead of depending on fleet purchases, demand is now centered on individual consumers. Edmunds forecasts fleet sales to shrink to 11% of new car purchases in the 3rd quarter. Last year, fleet sales accounted for 17% during the same period.
With demand rising the shortage is now palpable. Smart dealers removed discounts and promos as buyers competed for remaining stocks. A higher sticker price helps increase profitability for many dealers. Even if sales numbers are down, profits are higher.
More affordable payment terms due to lower interest also helped increase the demand. This includes a mind-boggling 0% for 84 months payment plan. Dealers also offered payment deferral and job assurance programs.
Jessica Caldwell, Edmunds Executive Director – insights, says hard-working Americans saved the industry. She said: “Most of the doomsday scenarios forecasted at the beginning of the pandemic, fortunately, did not hold true… the American consumer stepped up to become one of the many heroes in this chapter of resilience for the automotive industry.”
The auto industry benefited from many good breaks during the pandemic. The shutdown of auto plants caused a major loss of employment but helped them save money. This also limited the inventory, which spurred demand. It allowed dealers to sell without the need for promos or discounts. With the coronavirus threat, most people stopped public commuting and drove cars instead. Finally, lower interest rates gave rise to attractive payment terms. This attracted customers who resisted buying new vehicles due to interest rates. All these led to a resurgence in the 3rd quarter as auto sales picked up.
Now, buying a car has never been as attractive as now.
Watch this as CNBC reports that total auto sales for September are estimated at 15.9 million vehicles:
Are you planning on buying a vehicle, or have you bought one lately? Which factor was your main reason for buying? Was it the payment terms? Transport needs for the family? Or to help the economy? Let us know by sharing your comments below.
California To Ban Gas Cars
California To Ban Gasoline and Diesel Cars by 2035
California Governor Gavin Newsom (D) signed an order that California bans gas cars by 2035. The ban only covers sales of vehicles, but it remains one of the boldest US measures made to fight climate.
The executive order requires all new vehicles sold in the state to be zero-emission by 2035. This includes battery-powered, hydrogen fuel cell-running, or plug-in hybrids. California ban gas cars and trucks can reduce these emissions by 35%. Recent movements in Europe pushed for strict clean-air and greenhouse-gas requirements for vehicles. Around 15 countries committed to cleaning up, including Germany, France, and Norway. Even China got into the act a few years ago and pushed for zero-emission cars. As such, California already enforces emission rules stricter than federal standards. This new law now raises the stakes further in favor of electric vehicles.
Ban on Selling, Not Owning
Vehicles are responsible for over 40% of the greenhouse emissions in the state. The California ban gas cars cover the selling of combustible engine vehicles. It ends the sale of new gasoline-powered cars. State residents can still own gas or diesel cars or sell them in the secondhand market. According to IHS Markit, California owns more than 11% of all registered light vehicles in the U.S. last year. As of July, 6.2% of light vehicles in California were electric-powered, or 1.6% in the nation.
The order directs the California Air Resources Board (CARB) to craft the guidelines. It added that trucks and construction vehicles should also be zero-emission by 2045. During the signing, Newsom said that “Of all the simultaneous crises that we face as a state…none is more forceful than the issue of the climate crisis. What we’re advancing here today is a strategy to address that crisis head-on, to be as bold as the problem is big.”
The automotive trade group Alliance for Automotive Innovation is hesitant. Chief executive
John Bozzella said his members are committed to expanding EV models, but mandates like this one aren’t the best way to do so. He said: “What builds successful markets is widespread stakeholder engagement.”
A Ford Motor Co. spokesman said: “We agree with Gov. Newsom that it is time to take urgent action to address climate change…Progress requires public-private partnerships, smart infrastructure, and key resources that encourage consumers to invest in electrified products.”
To make this work, California will need new statewide charging infrastructure. It would also need to upgrade its aging power infrastructure to support that. At the same time, the state’s thousands of gasoline stations will need help in their phaseout.
Running Afoul of The White House
The Trump White House didn’t make the announcement kindly. White House spokesman Judd Deere noted the lengths Democrats will go. He said: “This is yet another example of how extreme the left has become. They want the government to dictate every aspect of every American’s life, and the lengths to which they will go to destroy jobs and raise costs on the consumer is alarming. President Trump won’t stand for it.”
A legal fight may be in the works from the Oval Office. The federal government is fighting California over its auto emission rules. In 2018, Trump followed through on a campaign promise to cut regulatory red tape. The EPA announced it will scrap Obama-era vehicle emissions and fuel economy standards. Trump remarked he is taking away California’s power to set its own emissions standards. As a result, states led by California sued the agency in 2019, and the case is currently before the appeals court in D.C.
Elections, SCOTUS Can Make or Break This Case
Supreme Court Justice Ruth Bader Ginsberg’s replacement might play a big role. If the GOP pushes through with a nominee and installs a justice, this could work in their favor. A conservative majority on the Supreme Court could strike down the California program. But this hinges on Trump winning the election in November. On the other hand, if Democrat Joe Biden wins, federal opposition would most likely stop.
Watch this as Bloomberg reports that the California ban gas cars sales in 2035:
California started the EV ball rolling, and other states might follow suit. Do you have plans to shift to an electric vehicle soon? Or, do you plan to hold on the old gas guzzler until the wheels fall off? Let us know what you think of California’s initiative by commenting below.
Hertz Pulls $500 Million Offering After SEC Review
Fortunately, Hertz won’t be able to sell worthless shares in exchange for real money.
The financially – and apparently morally – bankrupt company ended its bid to sell up to $500 million in new shares that it acknowledged likely didn’t amount to much.
In a regulatory filing yesterday, the company said that the stock offering “promptly” became “suspended pending further understanding of the nature and timing of the Staff’s review.”
In the filing, Hertz said that it had been in “regular contact” with the Securities and Exchange Commission all week. This came after the agency told the company on Monday that it planned to review the stock sale.
SEC Chairman Jay Clayton said Wednesday that his agency had concerns about Hertz’s plan to sell stock while the company is in the middle of bankruptcy proceedings.
“In this particular situation we have let the company know that we have comments on their disclosure. In most cases when you let a company know that the SEC has comments on their disclosure they do not go forward until those comments are resolved,” Clayton said during an appearance on CNBC.
When companies want to sell a security, in this case more shares, they submit a filing with the SEC. The agency will review the filing. It will also send comments back to the company consistently. In its feedback, it will ask the company to improve the disclosure or any irregularities in the filing. During his CNBC appearance, Clayton did not specifically mention the issues the SEC had with the Hertz filing.
“We at the SEC, were are trying to carry out our responsibility in situations like this as best we can and I expect the other professionals around the situation to carry out their responsibilities as best they can,” Clayton added.
Those disclosures filed by Hertz said “Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels.”
In plain talk, that means the new shares are worthless.
Hertz shares stopped trading for several hours yesterday before resuming again just before 3:30pm ET. Shares were up double-digits before closing the day with a modest 2.6% gain.
The company, which filed for bankruptcy on May 22, would traditionally get debtor-in-possession (DIP) financing. This would allow it to remain in business as the company went through bankruptcy proceedings.
However, after Hertz filed for bankruptcy, shares traded as low as $0.40 on May 26 before surging to as high as $6.25 on June 8.
Instead of taking the DIP loan that would need to be paid back, the company instead wanted to sell shares. I then planned to use the cash proceeds to pay off creditors. Hertz had hoped to sell up to $1 billion in shares, before trimming the proposed offering down to $500 million.
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