After Being So Wrong, Analysts Raise Tesla to a Hold
If there were a Hall of Shame for stock analysts, maintaining Tesla as a sell while it rocketed up the charts would be more than worthy.
We try not to be too hard on stock analysts, and understand that given that few of them have much of a clue about stocks, they are going to make a lot of mistakes, but some mistakes stand out more than others and some you just can’t let go without commentating on.
We shudder to think that there are actually people who follow these misguided recommendations, and it’s not even that the shaky ones come from just a few or even most of them, as the entire process of using fundamental analysis to predict price movements of stocks on the time frame they use, a year out or less, is just plain stupid.
If our approach is in itself detached from reality, you just aren’t going to predict reality very well, and can get so off course that you end up looking like a tremendous fool, or whatever you call being bearish about not just one of the hottest stocks in the market, but one of the hottest of all time.
Tesla’s move is as good as things get with a large cap stock, where it has risen 653% over the last 12 months and is still going. It did drop along with the market earlier in the year, and dropped a Tesla-sized 61% in that ugly month between Feb 19, and March 18, but if you were looking for bargains around that time, the 357% it has gained since then certainly would have qualified as a pretty nice one.
That’s more than the “market” grew during the entire 10-year bull market we just experienced, all in less than 5 months. If getting a better than a decade worth or returns during one of the biggest and longest bull markets in 5 months doesn’t excite you, nothing will. If you sat back and had this stock rated as a sell over this time, and you profess to be an expert in guiding people with their stocks, something is seriously wrong with you.
The one thing that we can really conclude from this is that if you can do something like this and not get fired, it’s hard to imagine what it would take, as you can’t mess up a call any more than this. There aren’t many worse that come to mind, although the call we shared with you that wanted us to short Apple when it was worth about half it is now is also worthy of mention. That one encourages investors to get molested though, not just see them passing up on a bonanza, and getting molested hurts more.
We wonder if there is even any responsibility taken for all the bad calls we see, on both sides, hanging with stocks that are falling off a cliff and maintaining hold recommendations as well as placing sell recommendations on some of the hottest stocks ever. Tesla is a different kind of hot though and wanting people to sell stocks through triple digit returns breaks new ground in the foolish call department.
There are some investors who like to short, and Tesla in particular draws a lot of short interest, While anyone who has been shorting Tesla like a position trader would , not just in for a pullback but with the intention of hanging on it, and then watch it explode against you, aren’t in their right mind to start with. When you encourage them to do such a thing by recommending a sell with Tesla through this, this isn’t just like giving small children matches, it’s like giving young kids matches who have already shown a tendency to be pyromaniacs.
As gruesome as margin calls are, they at least are a more merciful way to end a trade, where you don’t generally lose a whole lot more than all of your money versus several times all your money. We can make a lot of money shorting the right stocks at the right time, but there has perhaps never been a stock or a time so wrong as being on the sell side of Tesla lately.
We also have to extend our sympathies to any investor who was on the long side or seriously considering being on the long side of Tesla who took these recommendations to heart and either got out of their positions or did not enter based upon this advice. It doesn’t even matter what else you may have put your money on, as Tesla has dwarfed other stocks over this time and especially the more conservative ones that fundamental analysts like, directing you well away from success and preferring you be in some pretty terrible stocks comparatively.
Based upon its performance, if such a thing can be imagined to even matter, Tesla has deserved to not only be a hold, but a buy, a strong, strong, strong, strong buy, perhaps adding in a few more “strong” in there if these analysts had something besides just a single strong. 10 times stronger than the ones just considered to be strong perhaps deserves 10 of them. They seek to predict performance but believe they can do this by ignoring performance, which leads to as big of a conundrum as we might imagine.
This cashes out to scenarios similar to asking what your kids think of a stock and then just going with their recommendations and not even paying attention to whether the call was a good one or not, perhaps checking it 6 months later and then asking the kids again. The way analysts do this is actually even worse than this in fact, because the kids might guess right more often than you did with their uninformed picks than if you based your calls on things that run counter to performance, fundamental divergence.
In case people think that we are joking when we tell you so often that the strategy of fundamental analysis is to chase bad performance and run from good performance, favoring stocks which actually have poor outlooks and being turned off by those which have good outlooks, this is exactly what they do, and seeing Tesla maintained as a sell, alongside better ratings for some of the most terrible stocks in the market, elucidates this truth perhaps like nothing else.
This is not just a one off though, as this is how the minds of these analysts work, inverting reality and steering you away from the good and towards the bad. Tesla is also the perfect stock to use as an example to explain how they go so far wrong with this.
If you are of the persuasion that a stock’s value is determined by its present and near-term business results, as fundamental analysts do, an idea that is completely central to their profession and one that they are sworn to uphold the way that the President is sworn to uphold the Constitution, you have already guaranteed your failure, because this represents the opposite of reality, anti-reality if you will in the same way that anti-matter opposes matter.
It is not just that they miss more than they hit, it is that the strategy itself misses. The better a stock does, the more terrible it looks to them, and the worse a stock does, the better they like it. This doesn’t even require agency to drive, it is driven by their broken formulas themselves, the ones they all use.
The Better Stocks Do, the More Fundamental Analysts Fear Them
A stock like Tesla, to them, isn’t just bad, it’s off the charts bad, where the expectations of the future with the company far exceed their present capacity, and if they had stronger ratings to the downside than sell, this stock is worthy if any would be.
They spoke of how hideously “overvalued” Tesla was back when it was trading at $200, not much more than a year ago. Analysts use annualized earnings and then compare them to a stock’s price, where lower is seen as better, as they understand these earnings as equivalent to coupon rates with bonds, the amount of interest you collect with them, and then treat the result as yield.
Stocks that are making more relative to their trading price are thought of as being higher yielding and therefore better value, and stocks whose price is at a higher ratio than their earnings are seen as low yield.
This is how we calculate dividends with stocks, only this time they are not using dividends, they are using earnings. People use these calculations to exclude capital growth with bonds, which is foolish enough in itself and shows how out of it people are when they value investments, as what you make from holding bonds includes both this yield and the difference between the price you paid for the bond and what you sell it for.
It should strike us as incredible enough that anyone could invest in something and just totally forget that the price they paid for the investment and the price received when the investment is closed out could be ignored, but that’s what happens. Bond traders don’t miss this, or the ones that do make this huge mistake don’t trade them for long, because capital gains and losses is how traders make or lose money.
Not understanding how bonds work can get you in real trouble, in addition to the indignity of settling for grossly uncompetitive returns. We’ve been speaking of how risky treasuries are with yields as low as they have gone, while investors remain preoccupied with the low yields of the day. They don’t understand that low yields not only mean that the percentage of interest they get back is so low, they also mean that price risk is high.
Bond investors generally will invest not in single bonds but in a bond ETF, and even though they can see how price movements play out in the valuations of their shares in the fund which is tracked, somehow, they miss this. All ETFs have charts that track this, but they don’t bother looking at them. They just close their eyes to all this and hope, but that’s just not smart.
We’ve been telling our readers to beware of a coming bear market with bonds, where investors not only get stuck with the ridiculously low yields they got when they bought them, they also bought them at a time where bonds have been significantly overbought, where traders have driven the price of them to all-time highs. There’s only so much they can drive the price up though before this upward price pressure on them stabilizes and reverses, and seeing treasures move back toward more historical levels means that the value of your bonds will go down by a lot from here.
Investors love to pretend, and they will pretend that the price with bonds doesn’t matter, but just a single glance at a chart such as the benchmark iShares 20+ Treasury ETF tells a different story. This ETF peaked at around $171 in early March, plunged to $144 two weeks later, and then rallied back to $171 in April. After dropping back down to $156, it retested the $171 level again on August 4, and for the third time stopped its advance there, and has dropped to $163 already, on a downward trend.
If getting such low yields upsets you, you need to be a lot more upset about investing in something that has lost 5% just since August 4, 5 years’ worth of these paltry yields, and it’s not the 5% that you need to be worried about, it’s how much more your investment can lose as we get back more to normal with bond prices. Getting back to October 2018 levels will turn this recent 5% loss into a 35% loss, where the downside is large from here with virtually no upside, because these yields have hit the wall at $171. This is bad bet if there ever was one.
Investors make a similar mistake when they shoot for dividends with stocks, looking at yield and conveniently forgetting that capital gains and losses count as well. Investors will put their money into the riskiest and most terrible of stocks out there to seek their cherished dividends, only to find themselves way behind actual good stocks on the basis of total return, and often times suffer losses as they put the dividend into one pocket and have even more money taken out of the other in capital losses.
It is simply appalling how badly we understand these things, given that it should be so easy to figure this out. The divergence in understanding between good traders and just about anyone involved in investing, from the investors themselves to the legions that are supposed to be advising them, is simply enormous.
It may seem that we poke fun at these investors for what cannot be described any other way but just calling it stupid, but it is that we feel bad for all the people taken in by this and we do not want our readers among the hypnotized, and waking people up from these things cannot be achieved subtlety, as even the hardest shaking is not always enough.
If You Don’t Learn from Tesla, You Will Never Learn
As bad as ignoring the effects of movements in price with bonds and dividend plays are, what the fundamental analysts want us to do is even more foolish. The price of stocks will vary in their relationship to present earnings pretty broadly, where investors may only be willing to pay 6 or 7 times a company’s annual earnings or they may wish to pay a lot more, like 80 times earnings with Amazon or 800 times earnings with Tesla.
Just looking at this number in isolation doesn’t tell us much, as we need to view these things dynamically, so see how they are trending, and the only thing that is meaningful with looking at investment data is to see how the numbers are trending because predicting price trends is the goal of the exercise.
If we were to look at these ratios in isolation though, this can still be informative, as a way of determining how the market is valuing these stocks beyond the present. The higher a stock’s price is relative to its current earnings, the higher the market is valuing it in the future, and it is this future valuation that drives stock prices, not present earnings.
We can use the terms bullish and bearish here, where stocks that have a higher ratio of price to earnings are considered to be more bullish by the market, and those with lower ratios are considered less bullish or even bearish. The epic mistake that fundamental analysts make is to see the less bullish stocks as more bullish, and the more bullish stocks as less bullish, which has them getting all of this completely backwards.
Tesla grew from about $20 a share to over ten times that amount per share during a time where all they did is lose money year after year, for a whole decade in fact. By the time they finally got into the black, this past March, they finally had a price to earnings ratio that was something besides infinity. Fundamental analysts prefer this under 20 ideally, with lower being seen as better, and anything in the mid 20’s starts to really scare them, and over 30, don’t even talk about it.
If 30 scares you this much, the 521 that Tesla was at in June when they finally put together a running 12-month positive earnings period would be seen as terrifying beyond belief. If you understand how these things work, where higher is better here, and very high is very better, this alone would speak to you about the potential going forward, and all the stock has done since then with this incredible price to earnings ratio is almost double its stock price in less than two months, on top of its more than quintupling its stock price over the 12 months prior.
If a stock goes from $178 to over $1000 in just one year, that in itself scares the daylights out of fundamental analysts, because they believe that current earnings will restrain stock prices and no matter how unrestrained a stock is, and they don’t come any more unrestrained than Tesla. With a ratio that is already 25 times higher than what they are comfortable with, surely this has to stop, and they line up to share their delusions with the world and call for the sky to fall.
This is what you call incredible growth, but if you see a high P/E ratio as bad and one this high as unspeakably bad, it in understandable that you can delude yourself into thinking that Tesla has been a sell for quite a while in the face of this epic explosion in the other direction. The bearishness among analysts did not just start in June, and didn’t even start when Tesla took off last June, which we pointed out at the time that this could go crazy if the momentum continued. It did go crazy, but sadly for them, the analysts were already there.
Much like some terrorists can be made to talk if you torture them for long enough, the tide is starting to turn for Tesla now, as two analysts decided that they can finally take no more torture of seeing one of their sell recommendations continue to be so massively wrong.
Adam Jonas of Morgan Stanley and Bank of America’s John Murphy have decided that Tesla is finally good enough to hold. Both speak of current business conditions, as if this had much to do with it, talking of things like batteries and such and therefore still haven’t learned very much even though they have found a way to fit what they look at more with what is actually going on.
We don’t need to even speak of the reasons why these two gentlemen have upped their ratings on the Superman of stocks, thinking that they could wrestle Superman with their bare hands and being beaten to within an inch of their lives. The rationale behind their change of heart is as much nonsense as what had them so lost in the first place, and anyone that thinks that stocks are actually valued based solely on their near-term business prospects is a professional fool.
That may seem to some to be a little harsh, but we’re not sure what else to call someone who makes their living predicting stock movements by way of a particular way of understanding that is so completely at odds with reality but never dares to subject their beliefs to examination. It is not even the dogma that is so offensive here, it is that their dogmatic beliefs are so immune from validation.
Perhaps they might hold beliefs that are mystic and not the sort that could ever be evaluated empirically, which isn’t unreasonable at all, but when something can be validated empirically but you refuse to, we know for certain that you are guided by ignorance, not a desirable quality when you are supposed to be advising people on what to do with their money.
Their ignorance includes thinking that all investors think the way that they do and will restrain from buying and even sell stocks with higher ratios and jump on ones with lower ratios. Tesla at a ratio of 500:1 should crash violently, and seeing it instead add over 300:1 more in just a few weeks isn’t even enough to wake them up much.
This is all so much easier than even worrying about how many cars or batteries Tesla will sell in the near term, and then trying to reconcile this view with a stock price that pays no mind to these things, as all we need to do is follow the way the price of it moves to get a sense of what really matters, how much people are willing to pay for something and how this willingness changes over time.
Investors simply do not care very much at all where Tesla’s earnings will be in the next quarter, and they didn’t even care when the company posted massive losses quarter after quarter, as they saw promise. It’s this promise of good or bad, great or terrible, that moves stock prices, and ignoring this completely and thinking that stock prices move instead according to their busted theories and insisting this to still be valid in spite there is no evidence to support their view and overwhelming evidence exposing it as fraudulent may give new meaning to the term deluded in fact. There may not be strong enough words in the language to do this justice.
The market wasn’t too put off by these sell recommendations though, as they just ignored these misgivings and forged ahead, because the promise of profits speak louder than fundamentalist drivel. We’ll have to see how much further Tesla can move up in this current rally, but its price will rise as long as people wish to pay more. This is both a necessary and sufficient condition and the only condition in fact, where we actually dare to look at what is really going on to decide what is going on, wondering how the price will move and actually looking at what moves it.
Understand just this, and you will be well prepared to win this game. Don’t understand it, and you’ll be stuck with the wrong view and be distracted by irrelevance like these people are, and watch the Tesla’s go by and leave you behind because you are too confused and afraid to succeed but somehow are so comfortable with failing.
Editor, MarketReview.com
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.
Contact Andrew: andrew@marketreview.com
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