Tesla Motors’ (TSLA) Big “Problems”

My wife and I recently took her father out to celebrate his 91st birthday. He doesn’t drive anymore, but he has a keen eye for beautiful things—he had a long career as a jeweler—so he always appreciates riding in my Tesla.

And of course, when any news about Tesla Motors (TSLA) comes along, he likes to talk to me about it. So I wasn’t surprised when he asked me recently, “How’s your suspension?”

Obviously, he’d seen a news story about the National Highway Traffic Safety Administration (NHTSA) investigating the suspensions of the Tesla Model S, based in part on 40 consumer complaints.

Even The New York Times ran the story.

But what the Times and most other media missed was the fact that at least 30 of those complaints were submitted by one man in Australia who doesn’t even own a Tesla!

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So why did those media outlets run with the story?

Because bad news sells. Or, as the old adage has it, “If it bleeds, it leads.”

Today, that guideline is as true as ever, given the media’s hunger for clicks on internet links to prove to advertisers that people are reading their stories. Trouble is, sometimes the appetite for eyeballs trumps the desire to get the story straight.

And the surest source of readers’ eyeballs is the pairing of a high-profile name with some sort of misdeed, be it a failing of law or morality or taste.

Just ask Hulk Hogan, Taylor Swift or Tom Brady. A famous name combined with alleged wrongdoing is a sure recipe for attention.

But how does this apply to investing?

Well, in my collection of buttons obtained from the old Contrary Opinion Forum is this button.

Winds Blow Hard on High Hills

Winds Blow Hard on High Hills

The button reminds us that whenever we’re investing in a stock that has a high profile—whether it’s Tesla Motors or Apple (AAPL) or Facebook (FB) or Alibaba (BABA) or Whole Foods (WFM)—we should not be surprised when the winds blow hard. Whether it’s from a desire to make money from short selling, or simply to drag the mighty down to the level of the common, people enjoy finding fault with those who’ve achieved notoriety, if not success.

But back to Tesla Motors. At the top of this column, I mentioned Tesla Motors’ “problems.” So what might the others be?

One is the fact that some Tesla owners, after receiving repairs for free, which Tesla charged to “goodwill,” have been asked to sign non-disclosure agreements. Tesla Motors argues that the intent of these agreements was to prevent Tesla from being sued in the future for doing something for free. Remember, there are no independent Tesla dealers or repair shops; all maintenance and repair work is done by Tesla. But at the behest of the NHTSA, the company is revising the language in the agreement. (Personally, I’m thrilled whenever I see that word “goodwill” on my invoice.)

Another is the fact that CEO Elon Musk sold some of his stock recently. Given the fact that his annual salary at Tesla is $37,584 (California’s minimum wage), that’s a non-story.

Another is the story that tax credits for buyers of Tesla’s car will eventually run out. For critics, that leads to the conclusion that demand for the cars may dry up, but I’m highly skeptical.

Another is the story that Tesla “took away” Supercharging access from upcoming Model 3 buyers. The truth is, those buyers were never promised free Supercharging; they were promised that it would be “available,” and everyone who’s aware of modern marketing knows that “available” means there’s a price.

On the whole, therefore, these “problems” don’t seem particularly important. If there’s a major suspension issue, I trust that the NHTSA will discover it, though not before Tesla. And if there is no issue, it will fade into the background as one more of those “problems” that in retrospect were just bumps in the road.

Thus I continue to believe that Tesla Motors (which sold more large luxury vehicles in the U.S. last year than Audi, BMW, Jaguar, Lexus or Mercedes) remains on track toward a very bright future, leading the way in its mission “to accelerate the advent of sustainable transport by bringing compelling mass-market electric cars to market as soon as possible.”

And part of my conviction comes from the stock’s chart, which I’ve told you many times reflects all the knowledge and expectations of all interested investors. So let’s take a look at Tesla’s chart, from a long-term perspective.

Tesla TSLA Stock Chart

TSLA came public in June 2010 at a price of 25, and meandered slowly higher until early 2013, when the new Model S wowed the experts at Consumer Reports and all the automotive enthusiast magazines. By February 2014, the stock was trading at 265.

Since then, the stock’s ceiling has been in that neighborhood (287 last July), while its floor has generally been looser; the stock hit a notable low of 141 at February’s market low.

As a whole, this is a consolidation pattern, with the stock cooling off as the company’s fundamentals catch up.

Eventually, assuming that fundamental progress continues, and the company gets a significant piece of the mass-market automobile business, I expect the stock to break out above 285 and climb to further highs. But today, with the stock trading near the midpoint of its long-term trading range (the exact middle is 214), my best advice to readers who bought on my original recommendation (back when the stock was 29) is to continue holding.

But what if you aren’t among them?

In that case, TSLA is probably not your best buy today. Instead, you should focus on finding the next Tesla, the next Apple, the next Amazon and the next Netflix. Those are all stocks that have brought great wealth to Cabot investors in recent years, and the best place to find the next one is my own new service, Cabot Stock of the Week, which debuted just last week and will henceforth recommend one new stock, every week, which has been previously recommended by one of Cabot’s expert analysts.

For more details, click here.

Car Dealerships in Trouble

Scanning through stock charts recently, I noticed that some of the automobile dealers’ stocks looked terrible.

That’s no surprise. After posting record-breaking sales in 2015—seven years after the horrors of 2008—the industry is slowing down. New car sales are off, incentives (giveaways) are up, and profits are being squeezed.

These are the big six auto dealerships in the U.S., ranked by number of dealerships:

Penske Automotive (PAG)

AutoNation (AN)

Group 1 Automotive (GPI)

CarMax (KMX)

Lithia Motors (LAD)

Sonic Automotive (SAH) 

For all six of them, consensus analysts’ estimates for 2016 earnings have been reduced!

Now, it’s possible that these troubles will pass and the industry will get back on track.

But there are a couple of major trends that may make that achievement more difficult, and if so, these stocks could see a lot more downside!

For example, there’s the trend among millennials to reduced car ownership.

There’s the trend toward greater use of Uber, Lyft, Zipcar and other vehicle-sharing services.

There’s the trend toward fixed pricing of both new and used cars, currently used by AutoNation, CarMax and Tesla.

There’s the trend—admittedly still small—started by Tesla in which the manufacturer sells directly to the end user, cutting out the middleman totally.

And on the horizon are Apple and Google and other companies working on self-driving cars; these companies are also unlikely to market their wares through existing dealerships.

Now, I have no doubt that some of these established dealerships will adapt to deal with these trends; AutoNation and CarMax are among the pioneers in new thinking. But I also believe that many old-school dealerships, which rely on classic techniques that reward the salesman rather than the customer—and which employ, on average, some of the least trusted salespeople in the U.S.!—will slowly bite the dust.

So, seeing that probability, I turn to these six stocks and ask, based on both chart patterns and fundamentals, which is likely to fall the most.

And the answer is Lithia Motors (LAD), which has 138 auto dealerships in 15 states.

Lithia, based in Medford, Oregon, has been a real growth stock in recent years, thanks to its appetite for acquisitions, the latest of which was the purchase of DCH Auto Group in late 2014. Since 2011, both revenues and earnings at Lithia have grown more than threefold.

And the stock has been a rocket, too!

Since the 2008 market bottom, LAD has zoomed from a low of 1.53 to a high of 126!

Lithia LAD stock chart

But in the back of my mind is an aphorism from an old Wall Street investor that says, “When bull turns to bear, sell the stock that has gone up the most.

In the realm of auto dealership stocks, the stock that has gone up the most is Lithia Motors. And if the bull market in the sector turns to bear—thanks in part to those trends above—there could be much more downside ahead as the growth-oriented investors who drove the stock up continue to sell. They already started with a big exodus at the start of this year, and now LAD is on the verge of breaking down to new lows.

If you’re short selling stocks, it’s worth a look.

Timothy Lutts

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