Nick’s Note: We’re always looking for profitable ideas that you can add to your portfolio. But sometimes, the most sensible thing you can do to protect your wealth is avoid certain stocks. Today, my colleague Justin Spittler of Casey Research warns why you should stay away from Tesla at all costs.
By Justin Spittler, editor, Casey Daily Dispatch
“Tesla’s shareholders will be in for a rude awakening… Its share price could soon fall off a cliff.”
I issued this warning on October 5. But I’m sure some people thought I was crazy for saying this.
That’s because Tesla’s stock was up 66% on the year… and more than 900% since the start of 2013.
It was one of the hottest stocks on the planet. But it shouldn’t have been.
After all, it’s not like Tesla’s raking in cash. It’s never booked a yearly profit in its history.
Instead, Tesla was rallying because Elon Musk is a “visionary”…
Musk is the founder and CEO of Tesla.
But unlike most CEOs, Musk doesn’t care about quarterly profits. He only cares about changing the world.
He wants everyone to drive electric vehicles (EVs). He wants to put solar panels on every home in the United States. And he wants to colonize Mars.
These are wildly ambitious goals. But they make for a great story.
That’s why Tesla has some of the most loyal shareholders on the planet…
It’s also why many of its investors ignore problems that would send most people running for their lives.
Just consider how Tesla shareholders reacted to awful news last month.
Regular readers know where I’m headed with this. On October 2, Tesla announced that it had produced just 260 Model 3s, its first mass-market vehicle, during the third quarter. Musk had promised investors 1,500 vehicles.
That’s an 83% shortfall.
Normally, a stock crashes when a company whiffs this bad…
But Tesla rallied on the news.
Again, that’s because Tesla shareholders don’t care about profits, cash flows, or debt. They only care about Musk’s dreams.
But here’s the thing. Dreams don’t last forever. Eventually, you must wake up and face reality.
That’s why I urged readers to avoid Tesla on October 5.
Tesla will miss its production goal again… Tesla’s shareholders will be disappointed again. And next time, they might not be so forgiving.
And that’s exactly what happened…
On November 2, Tesla reported its worst quarterly results ever…
The electric carmaker lost $619 million last quarter. That’s nearly double the $336 million loss it suffered during the second quarter.
That’s a staggering loss. But it looks like things will get even worse for Tesla.
After all, the company just laid off about 700 employees. That’s about 2% of its workforce.
Tesla’s also struggling to ramp up production of its Model 3 vehicle.
Last month, Musk said Tesla would produce 5,000 Model 3s per week by the end of the year. But now he’s saying they won’t hit that mark until early 2018, at the earliest.
He also scrapped the company’s longtime goal of eventually producing 10,000 Model 3s per week.
Tesla’s stock plummeted 7% on the news…
Tesla’s now 22% off its recent highs.
You might be tempted to buy it now. But that would be a huge mistake…
Tesla isn’t cheap by any stretch of the imagination…
It still trades at a price-to-sales (P/S) ratio of 4.8.
That makes it more than twice as expensive as the average large-cap U.S. stock. More importantly, it’s 13 times more expensive than competitor General Motors. And it’s 15 times more expensive than Ford, another major U.S. carmaker.
There’s absolutely no reason why Tesla should be this expensive.
The company has never once booked a profit. Instead, it’s lost about $4.3 billion since it was founded 14 years ago, and that’s despite massive government handouts.
As if that weren’t bad enough, Tesla’s bleeding cash.
It’s burned through $2.6 billion in cash in just the last two quarters… and more than $10 billion since it was founded in 2003.
If this keeps up, Tesla could run out of cash within the next 12 months.
This is a serious problem…
But Musk and Co. aren’t actually trying to fix it. Instead, they’re trying to “paper it over.”
According to Bloomberg, Tesla has issued new stock eight times in the last seven years. That hurts existing shareholders.
But it gets worse.
Tesla also borrowed obscene amounts of money just to keep the lights on. Back in August, it issued $1.8 billion in “junk bonds” to finance the production of its Model 3 vehicles.
This isn’t just unsustainable. It’s a recipe for disaster.
In fact, I wouldn’t be surprised if Tesla’s stock goes down in flames the next time it reports a “hiccup.”
So, continue to avoid Tesla like the plague. You may even want to consider shorting (betting against) TSLA.
Just understand that shorting is risky. So, make sure you know what you’re doing before you put this trade on.
Editor, Casey Daily Dispatch
From John: Just reviewed the new videos in your Crypto Corner—outstanding job. You folks have really provided great resources for us in the crypto space. I appreciate your efforts.
From Bob W.: I’m up $20,000 on your cryptocurrency recommendations… Thanks so much!
Looking at the Crypto Corner, I don’t see any information on staying on the good side of the IRS. Are there any tools that you can recommend to track your crypto gains for tax reporting? If we’re going to get rich together, we also need to know how to handle the associated tax responsibilities. The IRS isn’t an organization that I want to mess with.
Nick’s Reply: Congrats on your gains, Bob. We deal with this question in the FAQ section of the Crypto Corner.
But to reiterate, we can’t give individualized tax advice. However, I’d urge you (and all our readers who’ve made crypto gains) to read my May 15 Daily issue (“If You’re Profiting From Bitcoin, Prepare for This Taxing Problem”). In that issue, you’ll find some helpful tips from Tyson Cross, a tax attorney who specializes in cryptocurrencies. Or you can check out the Cross Law Group right here.
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