Bullish on Tesla

by Timothy Lutts

This was published on February 13, 2012, back when TSLA was trading at 35. It was titled, “Romance, Transition and Reality”.

Moving on to a recommended investment, I’ll start by saying I could recommend 100 stocks today. That’s how strong this market is. Among well-known names alone, I could recommend Whole Foods Market (WFM), Ulta Salon (ULTA), Caterpillar (CAT), Home Depot (HD), FedEx (FDX), Lululemon (LULU) and Michael Kors (KORS).

All are growing, all are strong, and all have been recommended in Cabot advisories.

But instead I want to talk a bit about Tesla (TSLA), the electric car company.

The high points, quickly, are these:

Elon MuskTesla was founded and is led by Elon Musk, the genius who invented PayPal. There were co-founders but Elon is the man at the helm today.

The company is headquartered in Silicon Valley, and run like an Internet company, not an old-fashioned car company.

Its strategy of developing, building and selling high-priced cars first and then letting technology trickle down to lower-margin mass-market cars is working brilliantly; in fact, fourth quarter earnings were released last week and they were very good. Furthermore, Musk promises a profit for 2013!

And the company’s engineering is so good that Mercedes-Benz has contracted for Tesla to develop a new, all-electric powertrain, and Toyota has contracted to buy production powertrains in the second quarter of 2012. This is a great endorsement of Tesla’s cost structure; there are no pensions, and the work force is young, non-union and healthy.

But here’s what I like best about the company, and why I think it’s a long-term winner.

The company has made no mistakes!

Its cars perform superbly … while Chevy Volt, for example, has battery fires.

Management has achieved every target it has set, while Fisker has laid off people because it failed to meet a government load deadline.

To me, this speaks of top-quality management, and in the end, management is what you’re investing in. So far, Tesla’s management looks golden.

And the stock looks good, too.

It came public in June 2010 at 17, and is now trading at 35, just 4% off its all-time high.

Now, some people will say the stock is too expensive. After all, 2011 revenues were $204 million and the market is now valuing the company at $3.7 billion.

By comparison, you can buy General Motors for 28% of sales, and Ford for 35% of sales.

But I think valuation is irrelevant at this point.

What is relevant, contrarily, is the concept of Romance, Transition and Reality, a concept pioneered by my father, Carlton Lutts, who was both a romantic and an engineer.

He wrote, “A stock, like love, thrives on romance and dies on statistics.”

Which means that stocks that catch the public’s imagination can soar to extremes way before such soaring is justified by the numbers. It’s all about perception, and it happens with every new technology and in every bull market.

I’ve seen it in networking stocks; the original king was Cisco.

I’ve seen in data storage stocks; remember Iomega?

I’ve seen it in solar power stocks; First Solar shone brightly.

I’ve seen it is footwear; Crocs ran ahead of all the rest.

I’ve seen it in medical technology; remember Intuitive Surgical?

I’ve seen it in online brokers; investors in Schwab raked in the money.

I’ve seen it in communication stocks; remember Qwest and XM Satellite Radio?

And I’ve seen it in Internet stocks … America Online and Yahoo and Amazon.com, to name a few.

So here we are, at the dawn of a revolutionary new era in the automobile business, and the easiest thing for people to do is look at GM and Ford, stocks they are comfortable with, and discuss valuation.

Meanwhile, the real opportunity is in the unknown, in Tesla, where the “unforeseeable and incalculable” mean great riches are possible a short way down the road. The choice is up to you.

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