Andrew Hallam
07.10.2020
Will Growth Stocks, Like Tesla, Soon Make Value Stocks Look Great?
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Tesla’s electric cars are delighting people with their range, speed and style. But there’s something about the car manufacturer that few people know. Tesla doesn’t make money yet.
Yes, the stock’s growth has been extraordinary. If you invested $10,000 in Tesla’s stock in 2011, it would have grown to almost $1 million by August 31, 2020. That’s a compound annual return of 59.92 percent.
But since 2009, the electric icon has been losing money every year.
Tesla’s Stock Has Soared, But The Company Hasn’t Yet Made A Profit
| Years | Annual Net Loss |
|---|---|
| 2009 | -$55.7 million |
| 2010 | -$154 billion |
| 2011 | -$254 million |
| 2012 | -$396 million |
| 2013 | -$74 million |
| 2014 | -$294 million |
| 2015 | -$888 million |
| 2016 | -$773 million |
| 2017 | -$1.96 billion |
| 2018 | -$976 million |
| 2019 | -$862 million |
Source: Tesla’s annual reports
Based on Tesla’s market value (share price x outstanding shares) it’s the most valuable car company in the world, valued two-times more than Toyota. It’s worth four times more than Ford, GM and Fiat/Chrysler combined.
Looking at Tesla’s first two quarters of 2020, this might be the first year they record an annual profit. But it’s likely to be tiny, compared to the company’s market-cap. Tesla also has increasing competition. For example, according to Car and Driver, Ford’s electric Mustang Mach-E has a range of about 300 miles. It can go from 0-60 mph in less than 4 seconds. That’s in line with Tesla’s similarly priced Model Y.
If that’s not fast enough, Ford has a far faster version that should hit the market soon.
Tesla: A High-Priced Company Without Business Profits
| Tesla | Ford | GM | Toyota | Nissan | Honda | Volkswagen | Fiat/Chrysler | |
|---|---|---|---|---|---|---|---|---|
| Cost To Buy The Entire Business (Market Cap) | $390 billion | $27.45 billion | $42.93 billion | $186 billion | $15.47 billion | 42.3 billion | $85.67 billion | $27.84 billion |
| Net Business Profits/Losses 2017-2019* | $-3.80 Billion | $+11.3 Billion | $+10.62 Billion | $+60.23 Billion | $+37 Billion | $+19.95 Billion | $+36.53 Billion | $+13.72 billion |
Source: Morningstar.com
But I’m not focusing on Tesla versus other car companies. Instead, there’s something more systemic. As we did in the 1950s with electronic stocks, and in the 1990s with Internet stocks, we are, once-again, paying sky-high prices for growth. Once again, we are ignoring valuations. We’re saying, “Price doesn’t matter.”
As of September 11, 2020, Amazon traded at a whopping 119 times earnings. Netflix traded at 89 times earnings. The five biggest businesses in the S&P 500 (measured by market-cap) comprise almost 22 percent of the index’s value. That hasn’t occurred before. The big five include Apple, Microsoft, Amazon, Facebook and Alphabet (Google).
Yes, they’re fabulous companies. But most carry price tags far beyond their weight. Warren Buffett’s Berkshire Hathaway doesn’t rank among the five highest-priced stocks in the S&P 500. But its 2019 net business profits were higher than any of the big five. It earned $81.4 billion. That’s higher than Alphabet’s (Google’s), Amazon’s and Facebook’s combined.
Benjamin Graham said that, short-term, the stock market is a popularity contest. But long-term, it’s a weighing machine. Skeptics might say, “Prices no longer matter. For at least ten years, growth stocks have soared.” But prices always matter. When it comes to the market, ten years is a blip.
The price-to-earnings gap between growth and value stocks has never been higher than it is right now. And it could grow wider, still. But to stack the odds in your favor, consider sidestepping growth for value. When stocks crash, value stocks rarely fall as far. They’re also faster to recover–especially when the gap between growth and value grows this wide.
If you’re still holding candles for Tesla and its ilk, you certainly aren’t alone. These are popular stocks. Many people (perhaps most) believe they’ll keep soaring. But it’s worth remembering what Sir John Templeton said: “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.” What do you think Templeton would buy right now? Growth stocks or value stocks?
Diversified Portfolios of ETFs Weighted With Value Stocks
| Invests in… | Risk Tolerance | |||
|---|---|---|---|---|
| Conservative | Balanced | Assertive | ||
| iShares Edge MSCI World Value Factor ETF (IWVL) | Large Global Value Stocks, including U.S. stocks | 35% | 50% | 70% |
| iShares MSCI World Small Cap ETF (WSML) | Small Global Value Stocks, including U.S. stocks | 5% | 10% | 10% |
| iShares Core Global Aggregate Bond ETF (AGGG) | Global Government and Corporate Bonds | 60% | 40% | 20% |
Sources: iShares UK
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas
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