Tesla Follows its Own Road
Best Disruptive Stocks
LightInTheBox Holding Co. (LITB)
In recent weeks, I’ve been telling readers of my Cabot Stock of the Month Report to lighten up on their growth stocks, so they don’t lose money in this market correction. At the same time, I’ve been telling them to sit tight with their value stocks.
Which brought this query from a long-time subscriber in Powder Springs, Georgia.
“Why would you hold value holdings during a market correction and sell growth stocks, assuming both type of stocks are going to decline in value?”
We hold the value stocks because we know that they will eventually reach their Minimum Sell Price (if not always, well over 95% of the time).
We have no such assurance about growth stocks.
The companies behind these growth stocks may encounter business challenges that are hard to overcome (like Boeing, which we recently sold for a small profit). Or a stock may just be in for a long spell of underperformance, because it's had a big advance. Look at 3D Systems (DDD) today.
Yes, you can argue that the company is still good and that eventually the stock will rebound. But in fact, there is little certainty of that. The biggest mistake made by individual investors is holding on to stocks as they go down because the story—the reason they bought the stock—is still good.
Value stocks, contrarily, because they belong to high-quality predictable businesses, actually become more attractive as they fall, so I encourage my readers to buy more shares as prices fall. Not so with growth stocks.
With growth stocks, the very best indicator of which way a stock will go next is which way it’s going now. This is why moving averages are such an effective tool.
And in market corrections, such as we’re in now, the very best way to find stocks that will go up in the future is to find stocks that are going up now.
Which brings me to Tesla Motors (TSLA), a stock that has resisted this correction extremely well.
The stock’s big jump higher back on January 14—on six times average volume—was in reaction to the company’s release of fourth quarter sales figures, which beat all expectations.
And the buying since then, even while the broad market has been correcting, is—in my opinion—because increasing numbers of people are becoming convinced that the company has a great future.
So let’s review the story, which I know quite well because I actually own (and love) a Tesla Model S.
Tesla makes electric cars. Other companies do, too.
But Tesla has a better business plan, centered on four vehicles.
First it built a few thousand two-seat Roadsters, created by putting Tesla’s powertrain into bodies provided by Lotus. They sold for $109,000 each.
Today the Model S sedan has center stage, and while prices are still high (between $60,000 and $100,000), production is on a far greater scale, and the company is profitable.
Next will come the Model X SUV, on the same platform and at a similar price. Production volumes will continue to expand.
And then will come the more affordable (perhaps $40,000) third-generation car, for which profit margins will likely be lower, but overall profit higher, thanks to increased volumes.
And Tesla is not just about cars. Tesla delights its customers by selling its cars the same way Apple sells its wares—directly. There’s no dealer in the middle to haggle with. The price is fixed, and that delights customers.
Right now, there’s no inventory to haggle over. Every car is made to the specifications of the customer who ordered it. The time from order to delivery is roughly two to three months.
Also, Tesla does no advertising. Word of mouth from satisfied customers has driven most sales, though the company is doing more through social media now.
Furthermore there are the Superchargers, the network of charging stations Tesla is building that allows owners to recharge rapidly, for free, for as long as they own their cars. Today there are 76 Superchargers extending across the U.S. (as well as 14 in Europe), and every time a new one is announced, I feel the value of my car increases!
Then there’s the software. The centerpiece of the Model S cabin is the 17-inch touch-screen, which works just like an iPad or any tablet. Just as the software in those tablets can be updated, the software running the Model S can be updated, wirelessly. Eventually, the company will allow third-party developers to write apps for the car!
Today, I have a Tesla app on my phone that tells me where the car is, what the battery state is, and—best of all in these winter days—lets me turn on the heat, so the car is toasty when I get inside. What I want next—and I’m not alone—is a program I can schedule, so the car will automatically set its environment in time for my daily commute.
Beyond that, the sky’s the limit for apps. Just look what happened once Apple opened up development of apps for its iPhone.
The Model S has already received the highest ranking ever from the sober people at Consumer reports. It’s received the highest possible crash test rating from the National Highway Traffic Safety Administration. And Tesla just moved up to fifth place in Consumer Reports’ survey of most highly perceived cars, from eleventh last year.
Most owners are thrilled with their cars; they think they own the best car ever made. A New York broker and Cabot subscriber recently commented to me, “Cabot must have had a great year in 2013. Are you going to buy a Bentley next?” I answered, I don’t want a Bentley! Tesla is the best.
Some people liken the car’s acceleration to that of a rocket. I like the acceleration as much as anybody, but what I really like about the car is its quiet, its smoothness. To me, it’s like a magic carpet.
Fundamentally, the company is doing very well. Tesla sold 6,900 cars in the fourth quarter, beating analysts’ estimates by 20%. Official results, when they’re out (probably February 19), will reveal the fourth consecutive quarter of operating profit.
Lastly, we get to the chart analysis, which is actually extremely important and thus maybe should come first. As I said above, TSLA has resisted the market’s selling pressures, which to me says more buyers are coming on board.
I can’t predict exactly what it will do next, but it’s clear that the trend is up, and that only that old September high of 195 stands in its way of new-high territory. In fact, one reader recently commented that the persistent strength of TSLA reminded him of Cisco Systems (CSCO) back in its heyday.
So, am I encouraging you to back up the truck and buy a load of Tesla stock? Absolutely not. Diversification is always an important investing strategy, and technically, TSLA could easily fall to its 50-day moving average from here.
Furthermore, I long ago learned not to fall in love with stocks, especially stocks whose products I loved. It’s better to stay objective, and to follow proven rules.
I mention those rules regularly for the readers of my Cabot Stock of the Month Report (who were advised to buy TSLA at 29 back in December 2011). And I’ll be happy to share them with you, too, as I advise you how to handle all my favorite stocks (including TSLA), if you simply join me as a subscriber.
Moving on, it’s time for the seventh installment of “Best Disruptive Stocks".
Ideally, these are companies that address a mass market, and thus have the potential to impact our lives for the better.
Ideally, these are companies that are young and not yet well known or well respected. Thus they have the potential for increased perception by investors as time goes by.
Ideally, these stocks are young and not widely owned. Thus they have the potential to be bought by more investors—especially institutions—and thus see their stocks soar over time.
All the Cabot editors have made contributions to this list of ten, and the stocks are being presented in no particular order, though I am trying to feature them when they’re at good entry points. I hope you enjoy them.
Furthermore, I hope some of you bought last week’s recommendation Tableau Software (DATA), which released a blockbuster fourth quarter earnings report last Tuesday and gapped up 15% on Wednesday!
Disruptive Stock Number Seven
LightInTheBox Holding Co. (LITB)
LITB is the Top Pick for 2014 by Paul Goodwin, editor of Cabot China & Emerging Markets Report, so I’ll start by copying what Paul wrote just over a month ago.
“There is no rational way to figure out which emerging market stock will come out of top a year from now. Emerging markets are just too volatile for long-term projections. But I’m picking a stock based almost entirely on its story, which I think has the potential to be huge.
“The company is LightInTheBox Holding (LITB), and it’s a Chinese company that operates a global online retail site. LightInTheBox offers customers around the world a chance to buy customized products (like wedding gowns) direct from factories at low prices. The company’s websites are available in 27 languages and are reachable by 80% of global Internet users.
“LightInTheBox has been growing revenue fast (98% growth in 2011, 72% in 2012) and turned a profit in Q4 2012 and Q1 2013.
“The shares have been in a downtrend since the company’s August earnings report disappointed traders, falling from a high of $23 to around $8 in recent trading. LightInTheBox announced in December a share repurchase program of up to $20 million for its American Depositary Shares to run through December 2014. “There’s no doubt that there’s risk in LITB, but the potential is also huge. And at current levels, it’s a reasonable buy; just keep your stops handy.”
Since Paul wrote that, the stock has climbed to nearly 11, and it’s consolidating that gain now. Clearly, all the sellers are out, and now the buyers are slowly coming back to the stock, and new buyers (like yourself) are discovering it. There’s support at 9 from lows hit in January, and the 50-day moving average is at 8.60.
But the big event coming is the fourth-quarter earnings release, which is expected around February 18. If you’ve an appetite for high risk, you could just buy the stock here. You might get lucky. But the more prudent course would be to become a subscriber of Paul’s Cabot China & Emerging Markets Report, so you get his regular updates on all his recommendations.
FYI, in 2013, Paul’s Portfolio was up 50.1%.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher of Cabot Wealth Advisory