Tesla Motors Hit by Lawsuit

by Timothy Lutts

Tesla Model S on fireThis is a picture of a Tesla Model S in flames, after it ran over some road debris near Seattle back on October 1, 2013.

Since then, there have been two more Tesla fires. One was in Mexico at 4 AM. It occurred after a speeding driver drove across a roundabout and collided with a tree—not exactly recommended behavior. The other, in Tennessee, occurred after a Model S drove over a tow hitch on the highway.

In all three cases, the puncturing of the car’s battery pack resulted in a fire. And in all three cases, the occupants of the escaped unharmed, reinforcing supporters’ convictions that these cars, as the National Highway Safety Administration concluded, are the safest cars on the road. Also, in all three cases, the drivers were anxious to take possession of a replacement Model S.

But just last Friday, Tesla Motors was hit by a lawsuit from the firm of Pomerantz, Grossman, Hufford, Dahlstrom & Gross, alleging that Tesla’s management made false and misleading statements and failed to disclose material adverse facts about the company’s business. According the suit, which is open to shareholders who bought between May 10 and November 6, the cars’ battery packs suffered material defects that led to the fires, and the company’s failure to warn about that risk was misleading.

The lawyers also threw in a claim that “Tesla was unable to maintain a level of automobile deliveries sufficient to satisfy analyst concerns,” which to me is just silly. Tesla’s deliveries are growing at a nice rate, and the company’s job is not to satisfy analysts.

As to the fires, it’s worth knowing that there are roughly 150,000 car fires in the U.S. every year. These fires kill an average of four people every week. They don’t make national news; they’re far too common. But as battery-powered Teslas are new and unfamiliar to people, the three Tesla fires have made news.

But this lawsuit is not really about the automobiles; they’re marvelous vehicles, and everyone who has driven one wants one. This lawsuit is about money!

Specifically, it’s about getting investors who bought the stock relatively late to band together and complain about losing money in the stock’s decline since its peak of 192. If they win, the lawyers who initiated the suit get a nice payday.

winds-blow-hardWell, here’s my two cents, starting with one of the instructive buttons on my wall.

It reminds me that when a person or company is flying high, forces will eventually appear that work to knock that person or company down. I’ve seen it happen time and time again with both small hot stocks (Hansen Natural, for example) and big well-known stocks (like Apple).

When those forces arrive, the stock retraces a large part of its uphill climb, and that’s what Tesla is doing now. After gaining 466% this year, TSLA is now trending down, “helped” by stories about battery fires, stories about potential battery shortages, and stories speculating (among other things) that fearsome competitors like General Motors (LOL) will suddenly come out with competitive products.

Now, you can argue that this decline is not rational, given that the company is still growing at a good pace and projections for the future are bright. But the stock market is never rational, and success in investing does not come from being rational; it comes from understanding the irrationality of the market and using that knowledge to make intelligent investment choices.

For me, it was rational to buy Tesla late last year when the stock was just getting going and upside potential was huge. To many people, it looked irrational because there were so many unanswered questions about the company. But in the months that followed, more and more people discovered how good the cars were and recognized the company’s growth potential, and a lot of them bought the stock, pushing its price higher and higher. Also helping was a broad bull market.

But when the stock was up 400%, sitting on a high hill, and the object of admiration and adulation by so many people, buying was not so intelligent, because at that point, there were a lot of investors with profits in the stock, ready to cash out when the stock turned down.  And then the stock turned down.

This is a normal phenomenon. It happened with Hansen Natural years ago. It happened with Crocs. It happened with Apple more recently. And now it’s happening with Tesla. On the way up the mountain, the good news and the profit engender more good news. And on the way down the mountain, the bad news and the stock losses engender more bad news, and lawsuits (and today, even a little story about George Clooney, who was dissatisfied with his early Tesla Roadster, which from today’s perspective we might call a beta version.) Also helping is a weaker stock market, especially for growth stocks.

History tells me that Tesla’s downtrend will eventually run its course, and at the very bottom, the news will be bad. That’s when stocks bottom. But getting from here to there will take time, and there’s no use arguing with the stock while this evolution takes place. It takes time for the crowd to change its mind. And it will take time for this lawsuit to run its course.

Eventually, assuming that Tesla will continue to grow both revenues and earnings, the stock will begin a new uptrend. But until then, there are more attractive investments than Tesla.

My Favorite Stock: TSLA

by Timothy Lutts

I originally wrote this on March 18, 2013, as the final installment of a series titled “Ten Stocks to Hold Forever.” You can see the background info on the concept here.

In the brief time since this was published, Tesla stock (TSLA) has performed superbly, gaining 48%, while ex-competitor Fisker is nearly bankrupt, and the subject of interest by no “distressed-company” buyers. (April 2013)

Though I work very hard to avoid falling in love with stocks, I will confess that TSLA is my favorite stock.

Tesla Motors was founded 10 years ago by Elon Musk, who made a small fortune selling PayPal to eBay, and it’s different from traditional automobile companies in five big ways.

First, its cars use no gasoline. They’re all-electric, recharged primarily by plugging in and secondarily by regenerative braking.

Second, its cars are made in California, guided by a business plan generally used for technology companies.

Third, its cars are not sold by dealers; they’re sold directly by the company, either in showrooms (like Apple) or remotely.

Fourth, Tesla carries no inventory. It has a backlog of orders, so each car is manufactured for a specific customer.

Fifth, Tesla offers no financing; it takes deposits when taking reservations, and is paid in full upon delivery.

In short, the Tesla buyer gets a much cleaner experience than what most of us are accustomed to when buying a car. And maintenance of the cars is simpler, too, with only tires, brake pads and windshield wipers needing regular attention.

Tesla Model S, tslaBut here’s the best part. In addition to all the above, the company’s first high-volume car, the Model S, is simply a joy to drive!

It can go from 0-60 MPH in 4.1 seconds (with the biggest battery pack); that’s quicker than a Porsche 911. Or it can go 300 miles on a single charge. Its center of gravity is so low (the battery is the floor) that it corners like a go-kart. And it seats five adults, with room for luggage in both the back and in the front (where the engine is in most cars).

(Note: I’m not buying one until I can get two features I’ve grow accustomed to in my Audi: all-wheel drive and a back-up camera.)

The Tesla Model S has won:

  • Motor Trend’s Car of the Year Award, with the first-ever unanimous vote.
  • Automobile Magazine’s Automobile of the Year Award.
  • Yahoo Autos’ Car of the Year Award.

In short, the car is wonderful. And the engineering has been nearly perfect.

Contrast that with competitor Fisker Automotive, born soon after Tesla and competing for the same market with a hybrid powertrain. Fiskers have had numerous technical troubles. Battery supplier A123 went bankrupt. 300 cars were ruined by Hurricane Sandy. And founder Henrik Fisker recently resigned, reportedly as the Chinese firm Geely (which now owns Volvo) discussed a takeover.

Tesla, meanwhile, is on target to turn a profit in the first quarter of this year, and to deliver 20,000 cars this year. And the Model S has been so well received that the company is delaying the production of its lower-priced SUV (Model X), so it can manufacture more Model S sedans.

Now, investing in automobile companies is always challenging, mainly because this is a mature industry. And investing in automobile startups has traditionally been an excellent way to lose money. But I think Tesla is going to succeed in a big way precisely because it is doing so much differently, because Elon Musk is an exceptionally capable leader, and because the world (this is a global story) is ready for a car that frees its users from the tyranny of the gas pump.