by Timothy Lutts
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.
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.