My great-grandfather, Albert Clarence Smith, was a transportation expert—which in the 19th century meant horses. As a young man, he drove horses pulling the apparatus of the Salem Fire Department, and after that he opened his own business, stabling horses, dealing in horses, and taking at least one train trip to Chicago to buy horses and bring them back to Salem.
But when a business associate offered him an opportunity to get in on the ground floor of the automobile business, Albert turned him down.
And that’s totally understandable. It’s hard to change. “Once a horse man, always a horse man,” he might have said.
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But the world does change, and will keep on changing, so the challenge for growth-oriented investors is to ensure that your investments are in the stocks of the companies leading change, where profits grow faster, than in the stock of the companies lagging behind.
Internet retailing, for example, has been a great growth sector over the past two decades, while brick-and-mortar stores have been closing.
The marijuana industry is growing fast, while the big old tobacco industry is slowly shrinking.
The natural gas industry has boomed, while the coal industry is dying a slow death.
So here we are roughly a century after my great-grandfather chose to stick with horses, and people are being presented with a similar choice: Jump on board the electric car bandwagon, led by Tesla (TSLA), or stick with the stocks of well-established gasoline carmakers.
The Case for Gasoline Cars
Gasoline cars are based on a proven technology with a well-established support infrastructure that enables travel virtually everywhere. Everyone is familiar with them, competition allows a wide variety of choices for consumers, and they provide a lot of jobs, in design and manufacturing, in sales and service, and in the oil industry that provides the fuel for them.
The downside of gasoline cars is the pollution they cause, which affects people’s health (in the relatively short run) and our planet’s climate (in the long run).
The Case for Gasoline Car Stocks
The stocks of these companies are incredibly cheap.
On a price/sales basis, Fiat Chrysler (FCAU) is the biggest bargain among these 10 car stocks. Of course, the company has had some management trouble lately.
And on a price/earnings basis, Volkswagen (VWAGY) is the cheapest. Of course, the company had some legal troubles related to emissions in recent years.
And all these old car companies pay dividends, ranging from 1.8% at Volkswagen to 6.7% at Ford (F). That’s way better than you can get at the bank!
But then there’s the question of growth. If a company isn’t growing, it may have to cut its dividend. And these companies are all having a real problem finding growth, with the best of them sporting low single-digit growth rates and the worst seeing revenues fall. Looking ahead, as the industry evolves due to changes in ownership models and self-driving cars and ride services, I expect the challenges to grow for these companies.
The Case for Electric Cars
Electric cars are more efficient at using energy. Electric cars are simpler to manufacture, with fewer parts, and they require less maintenance. Electric cars pollute far less, even considering the source of the electricity that charges their batteries. Electric cars are quieter, resulting in less noise pollution. And electric cars provide better performance.
The two biggest problems with electric cars relate to charging, both at home and on the road. For daily usage, it’s best to have a charger available at either home or work—and most people don’t have that yet. And for long trips, it’s good to have access to a fast-charging network—and right now, Tesla is the only brand with widespread coverage.
But the trends are in place, so eventually, the chargers will be there.
And eventually, if the parallel to my great-grandfather’s horses runs true, gasoline-powered cars will be a rare sight on the roads.
In fact, there’s already talk that before long, China will ban the sale of new cars that burn gasoline. (China stimulated the electric car market a few years ago, spurring the launch of more than a hundred electric car brands, and the race for survival of the fittest is well under way, with publicly traded Nio (NIO) being one of the contenders.)
The Case for Electric Car Stocks
If you could go back a century, would you invest in some of those young car companies, like Ford, Buick, Dodge and Cadillac—or would you stick with horses? The long-term best choice is obvious from today’s perspective.
Similarly, today, should you invest in some of those fast-growing electric car companies or stick with the cheap, dividend-paying gasoline car manufacturers? To me, the long-term choice is clear.
Sure, some of those old companies will adapt and survive in the new electric car world. General Motors (GM) just pledged to invest $2 billion in an old plant in Detroit, so maybe it will be a survivor. But there will be casualties along the way.
The Case for Tesla Stock
As was widely reported last week, Tesla’s fourth-quarter results were a home run, exceeding analysts’ projections and leading more analysts to conclude that Tesla has turned the corner and will become a major force in the automobile market while the old guard is playing catch-up.
For year 2020, vehicle deliveries should comfortably exceed 500,000 units. Production ramp of the Model Y in Fremont has begun ahead of schedule. Model 3 production in Shanghai is continuing to ramp while Model Y production in Shanghai will begin in 2021. And the company is planning to produce limited volumes of Tesla Semi this year—and next year the Cybertruck.
Additionally, because customers are increasingly buying their Tesla vehicles online, deliveries grew 50% in 2019, while the company’s retail footprint remained unchanged.
And all those sales were achieved with no paid advertising!
So trends are good for Tesla and I believe strongly in following trends—because they typically last longer and go farther than people expect.
The Unforeseeable and Incalculable
Back in 1972, a successful investor by the name of Thomas Phelps wrote a book titled 100-to-1 in the Stock Market in which he documented the great successes ordinary investors could achieve simply by buying growth companies and holding long-term—really long-term. He wrote, “Perhaps the greatest advantage of all in buying top quality stocks without visible ceilings on their growth is that when we do so we give ourselves the chance to profit by the unforeseeable and the incalculable.”
For Tesla, the unforeseeable and the incalculable include not only its future vehicles and its shared fleet of self-driving cars but also the company’s future achievements in the fields of solar power and energy storage—both home scale and utility scale. The company expects both its solar power and energy storage deployments to grow at least 50% in 2020, and in the long run, it’s possible that the company’s energy business will exceed its automotive business.
Long-term, therefore, I believe TSLA is worth $100 billion. I’m holding tight to my stock. But I don’t believe it’s a great buy here. I much prefer to buy stocks of companies that are not well known and not well loved, like Tesla was back in 2011 when I added it to my Cabot Stock of the Week portfolio—which now has a profit exceeding 2,000%.
On that note, I recently added a new stock to the portfolio that has an exciting new business model that could change the world as much as Tesla has changed the automotive world. The stock came just public last year, but my profit is about 90% already. If you’d like to know more about it, just click here.
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