If you want gains like those that investors have made in Tesla (TSLA) stock over the past decade, you need to find the next Tesla. Here’s how to do it.
Tesla’s been a great stock to own in the last year, zooming 237% and splitting its stock 5-for-1 in the process.
It’s been an even better stock to own over the last nine years. Readers who bought the stock when I recommended it in Cabot Stock of the Week back in December 2011 and held on (as I’ve recommended) now have profits of 9,865%!
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Long-term, I think investors with large unrealized capital gains in Tesla (TSLA) should continue to hold the stock, simply because prospects for the company are still bright, as it revolutionizes not only the automobile industry but also the energy industry.
But short-term, I think the stock’s potential downside exceeds the potential upside, even after a big retreat in the last four months.
So if you’ve got new money to invest and you want Tesla-like profits, I think you should try to find—and invest in—the next Tesla. And how do you identify that stock?
Here’s my short checklist.
- The company serves a mass market—which means it can grow very large.
- The company has the potential to revolutionize an important part of that market.
- The company has the potential to make a large profit in the process.
- The stock is NOT loved by most investors today. And the less it is loved, the better!
- The stock has positive momentum. It doesn’t have to be hot, but it does need to be positive.
So let’s look at a few candidates for the next Tesla, starting in the obvious place—the electric car industry.
Nio (NIO) A few years ago, China offered massive subsidies to jump-start the country’s electric vehicle industry—and the result was hundreds of home-grown contenders! But those subsidies have since been reduced, and what’s left today is the cream of the crop, like Nio. 2020 revenues were $2.36 billion, up 108% from the year before. I think Nio ticks all the boxes, and the stock seems to be back on the uptick after losing exactly half its value from early February to early May.
Zoom Video (ZM) Zoom Video checks almost all the boxes. Mass market. Revolutionary. Capable of big earnings (2020 saw revenue of $2.65 billion, up 326% from the year before and EPS of $2.37, up 2,350%). And positive momentum; the stock is up 65% in the last year, taking advantage of a full year of socially distanced and virtual get-togethers. The one box unchecked is that of low public opinion. Everyone knows Zoom and many people love Zoom, which is one reason the stock took off last year – and has cooled so far this year. Additionally, I don’t see any real barriers to entry.
Roku (ROKU) Roku might be called the gatekeeper to the streaming media-verse, as its digital media players enable the playing of content from any provider on any device. The mass market is global and growing. Revenue growth (up 57% in 2020) is good and getting better. The barrier to entry is substantial. The chart is healthy, not overextended. And public/investor opinion is good, neither hot nor cold.
Teladoc (TDOC) Accelerating revenue growth is one of my favorite metrics; it tells you that business is improving at an increasingly fast pace, which makes it hard for analysts to adjust their estimates upward fast enough. That’s the case at Teladoc, the provider of on-demand health care services over the internet. Revenues in the latest quarters grew 109%, 145% and 151%—accelerating. The service is revolutionary in an industry that sorely needs it. The chart is healthy, not overextended. And public sentiment is good, but not gaga.
Spotify (SPOT) The streaming music (and more) service definitely addresses a mass market and it has a healthy chart. But it’s evolutionary, not revolutionary. And it’s not growing fast enough. In the latest quarter, revenues were up just 26% from the year before—up from 25% in the previous quarter.
Virgin Galactic Holdings (SPCE) If all goes well, Sir Richard Branson will be on his company’s first flight to space that includes paying passengers sometime later this year. Revolutionary? Absolutely! Big potential? Yes! Big earnings potential? Eventually—the long-term goal is ultra-fast transcontinental travel, like New York to Tokyo in two hours. Obviously, there are major hurdles. But the company is well funded and has experienced management, so it’s quite possible. As for the stock, it’s come crashing back to earth the last few months after heading to the stratosphere in January. At 34, it’s well shy of its peak above 59 in February, but higher than where it started the year (23). Looks like a good entry point, especially now that it’s gone nowhere but up since bottoming at 15 less than a month ago.
Curaleaf (CURLF) Curaleaf is the biggest marijuana company in the U.S., and because the barriers to entry in the industry are not technical, but regulatory, it’s the odds-on favorite to remain the leader. First-quarter revenues were $260 million, up 170% from the year before, thanks in part to the acquisition of Grassroots, and the company is expected to have positive earnings in 2021. The chart is healthy, and cannabis stocks seem to be primed for another leg up after three months of consolidation. And sentiment among Americans as a whole is varied, with a third of the population still not in favor of legalizing the industry and a very large percentage unaware of the company.
My favorites for the next Tesla:
Looking at the charts as much as anything (because buying smart is the first step to long-term gains), right now I prefer Curaleaf (CURLF) and Roku (ROKU). Those are my top two candidates to be the next Tesla.
Do you have a stock in your portfolio that you think could become the next Tesla? Tell us about it in the comments.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More
*This post has been updated from an original version, published in 2020.