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 361% 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 11,867%!
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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 the big ups and downs of the last three 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. Fourth-quarter 2020 revenues were $653 million, up 133% from the year before. I think Nio ticks all the boxes, though the steep drop-off from 62 to 43 in the last three weeks has yet to find a bottom, so I’d wait until it does.
Nikola (NKLA) Taking Mr. Tesla’s first name, Nikola is a Utah startup with dreams of building electric semi trucks powered by hydrogen fuel cells. Technically the idea has a lot of merit; the challenge is overcoming the established fossil-fuel-centric order. In the meantime, noting the appetite for Tesla’s Cybertruck, the company is taking reservations for its own (non-hydrogen) electric pickup truck, one that is far more conventionally styled than Elon Musk’s vehicle. Newly public last year, the stock’s chart shows some serious buying last May and June, through the initial strength has faded and then some, especially after a damning short-seller report emerged in September. In my mind, the company has some major obstacles to surmount (it has no revenues yet), but success is possible. And the company is definitely not loved by the masses; it’s hardly known.
Zoom Video (ZM) Zoom Video checks almost all the boxes. Mass market. Revolutionary. Capable of big earnings (the fourth quarter saw revenue of $777 million, up 366% from the year before and EPS of $0.99, up 8,884%). And (very) positive momentum; the stock is up 229% in the last year, taking advantage of nearly 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 has more than tripled. 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 58% in the fourth quarter) 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 85%, 109% and 145%—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 25% from the year before—up from 20% 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 weeks after heading to the stratosphere in January. At 33, it’s well shy of its peak above 59 in February, but higher than where it started the year (23). Could be a good entry point, but I’d wait for it to stop plummeting before making any buys.
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. Third-quarter revenues were $182 million, up 195% 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 the marijuana sector has been on a tear, though it’s started to pull back of late. 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.
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.