Should UK investors buy Tesla stock now?

Paul Summers — Wed, 15 Jul 2020 06:05:20 +0000

US electric car maker Tesla (NASDAQ: TSLA) has been one of the success stories on the US market this year. The shares are now a staggering 250% higher than where they were at the beginning of 2020.

What’s behind this explosive rise and should UK investors consider taking a stake now?

Why is Tesla racing away?

There are a few reasons for its momentum. First, the buzz around electric vehicles looks to have moved into a higher gear. Increased concern for the environment and the firm’s technical supremacy over other manufacturers (it’s expected to unveil a million-mile, low-cost battery in September) has put Tesla in a thematic sweet spot. Factor-in investors’ belief in the visionary brilliance of CEO Elon Musk and Tesla’s rise, while extreme, makes some sense.

Another reason for this rise rests on its status as the ultimate ‘Marmite stock’. But those who loathe it question how a company that still only sells thousands of cars a year can be worth more than those that sell millions combined. This has previously led to massive ‘shorting’ of the stock — traders betting Tesla’s share price will fall.

One explanation for why this hasn’t happened is old-fashioned herd speculation. With no sports to bet on during lockdown and buoyed by Federal Reserve’s relief packages, bored novice investors have flooded markets in recent months. Many, it would seem, have put their money into Tesla. This has, in turn, forced said shorters to desperately close their positions (known as a ‘short squeeze’), further propelling the shares upwards.

Will it keep rising?

It’s hard to say if this can last. History is littered with companies continuing to rise in value despite becoming utterly detached from their fundamentals (which Tesla arguably is). Greed is a powerful motivator. So too is a great story.

What we do know is that Tesla ‘shorts’ are now at their lowest level on record. With fewer positions left to close, this could mean the big gains seen recently may be at an end. Adding to the bear case, market jitters over a second coronavirus wave could cause a heavy bout of profit-taking.

Last, let’s not forget that Musk’s unpredictability can be a liability for Tesla. In May, he suggested that the value of stock in his own company was “too high“, causing the shares to fall 10%.

Taking all this into account, I’d suggest anyone thinking of buying Tesla now should tread carefully if they don’t intend on holding for years. The long-term potential might be even better than anticipated, but the probability of near-term volatility up to the next earnings update on July 22 (and perhaps medium-term choppiness too) is very real.

Any alternatives?

One option for less risk-tolerant readers would be to look for a fund with shares in the company. UK-based, tech-focused, FTSE 100 member Scottish Mortgage Investment Trust is an example. Tesla is its biggest holding. Unsurprisingly, performance this year has been excellent. The fees charged are also reasonable for an actively-managed fund.

A passive alternative is the iShares Electric Vehicles and Driving Technology UCITS ETF. It has 3.31% of its assets in Tesla but is diversified across 84 other stocks. This should give holders sufficient protection while allowing them access to one of the decade’s biggest investment themes.

Buying either also avoids the paperwork required by brokers when you buy US stocks.

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Paul Summers owns shares in Scottish Mortgage Investment Trust. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Are we on the brink of a recession?

Jack Dingwall — Fri, 30 Sep 2016 10:28:47 +0000

UBS analysts this week said that the US has a 31% chance of having a recession next year. Does this mean the world is heading toward another crisis?

Weak US jobs data

While unemployment rates in the US are hanging around the 4.9% mark it’s the non-farm payroll data that’s receiving most of the attention. The Federal Reserve was poised to raise rates but sluggish non-farm payroll data has quashed an interest rate rise this summer. In August the US created 151,000 jobs, which was under the 180,000 forecast and put a damper on the two previous months of good growth. US manufacturing also shrank in December, which added weight to the argument that the US economy is slowing. If the US slips into recession next year then it’s likely that the world economy will be dragged lower too.

Chinese slowdown

Although China has fallen out of the news since February it’s still a worrying situation. GDP data does look promising but analysts pointed out that this growth was driven by government stimulus rather than expansion in the private sector. Private sector investment was actually down 3.8% in the half of 2016. China remains a key part of the complex global economic landscape and any further slowdown in China would have serious knock-on effects in the US and the rest of the world. I think all investors should have one eye on China at all times.

Debt crisis

I think it’s fair to say that in the last few decades the world has gone debt mad. Developing country debt rose by a whopping $31trn between 2000 and 2014 and emerging economies also took on vast amounts of debt. However, corporate debt is the main issue and that figure currently stands at $51trn. Faced with poor organic growth alongside rock bottom borrowing rates, businesses have leveraged balance sheets and used debt to buy back shares, acquire businesses and pay dividends. This has led to a lack of organic growth across the world and if the ‘debt binge’ ends, then we could see lots of companies in deep trouble.

Europe’s banks look weak

The banks of Europe have been struggling for years and it looks like the first big victim may be on its way. After worrying over French, Italian and Greek banks for years the focus has switched to Germany. The German banks and in particular Deutsche Bank don’t look solid. It has over $70trn of derivative exposure, billions of dollars worth of fines and lawsuits to pay and deep connections to most of the world’s banks. This makes the company key to the health of the global banking system and in particular Europe’s banks.

However, if you think we’re slipping into recession, there’s still value and upside to be found in equity markets with a number of solid, defensive shares. Defensives like British American Tobacco and Centrica could provide a great safe haven for cash and pay you a nice dividend. AstraZeneca for example returned over 29% in crisis year 2008 while the FTSE 100 fell a whopping 31%. That’s an impressive outperformance of 60% in just 12 months.

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