A Stock With Long-Term 'Juice'

06/18/2013 6:30 am EST


Timothy Lutts

Publisher, Cabot Heritage Corporation

The appreciation in this stock is not just a short-term fluke, says Timothy Lutts of Cabot Wealth Advisory.

Back on December 18, when Tesla Motors (TSLA) was trading at $34, JPMorgan said, "We initiate coverage on shares of Tesla Motors with a Neutral rating, relative to our combined autos and auto parts coverage, and establish a December 2013 price target of $37, suggesting +8% upside potential.

"Our Neutral rating balances notable investment positives—including a highly differentiated business model, appealing product portfolio, and leading-edge technology—with above-average execution risk and valuation that seems to be pricing in a lot."

In the three months after that, TSLA traded between $35 and $40, and JPMorgan looked pretty smart. But then, in an amazing eight-week performance, TSLA shot up into triple-digits.

Why do I bring this up now? Because this past weekend, Barron's joined JPMorgan's non-party with a cover story suggesting that TSLA could fall to $50 if it doesn't get its battery costs down fast, and if the Chinese market doesn't buy the company's cars as expected, and if the company's upcoming $30,000 car is outsold by electric cars from the likes of Toyota (TM), GM (GM), etc.

The Barron's point—which it likes to make with every popular young stock that reaches nosebleed territory—is that TSLA is overvalued and the stock is risky here. Of course Tesla is overvalued here.

But Tesla is probably undervalued from a long-term perspective. And if you're going to be a long-term investor in TSLA—or any great growth stock—you've got to realize that stocks seldom sell for fair value. There are always stocks that are overvalued, and stocks that are undervalued.

That's because the market is simply the aggregate of the actions of all investors with opinions about the future. These investors don't simply consider profit margins and P/E ratios; these investors are also influenced by hopes and dreams, anxieties, and fears.

The trouble with traditional analysts is that many have no imagination. Only six months ago, the analysts at JPMorgan had trouble imagining that the stock could hit $100:

  • They didn't anticipate the blowout first-quarter earnings report.
  • They didn't anticipate the short squeeze.
  • And they didn't anticipate the secondary offering, which raised more than $1 billion and allowed the company to repay its loan to Uncle Sam—nine years early!

What else haven't the analysts imagined? How about the possibility that Tesla's Model S might be even better received in China and Europe—where gasoline costs much more—than in the US?

How about the possibility that the company might expand its partnerships with Toyota and/or Mercedes? How about the possibility that Tesla might—as an American manufacturer of cars—benefit from the "Buy American" movement among a wide swath of citizens who avoid buying foreign cars? Those are all fairly good possibilities, short-term.

Looking longer term, how about the possibility that Tesla's supercharger network might become the standard in fast recharging technology, and that Tesla collects licensing fees from other manufacturers?

How about the possibility that grassroots activism might defeat the protectionist actions of the auto dealers' associations by getting federal legislation to allow direct sales of cars to individuals in every state? And how about the possibility that Tesla might partner with Google (GOOG) to produce the first driverless car?

Thinking even more creatively, try to imagine the insurance industry's approach to insuring cars that will not be at fault in any accidents. Yes, it's longer-term, but it is coming.

In sum, I continue to believe that the long-term prospects for Tesla Motors are very bright, and I continue to believe that the stock is an attractive long-term investment.

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