Tesla (TSLA) is one of the most controversial stocks there is. They are a company that is attempting to disrupt one of the oldest, largest, most powerful industries in America. It is led by a charismatic figure in Elon Musk, who cannot seem to stop making headlines.
Its proponents have often approached support of the company and its stock with a religious fervor, while its detractors often seem to hate the company with a passion that goes well beyond any logical doubts about its profitability or future.
What cannot be doubted, though, is that early investors in the stock have made a killing, and those who bought a few months ago when TSLA was trading at around $200 have also done well, making two or three hundred percent in a couple of months.
TSLA went public on June 29th, 2010, with an initial offering price of $17 per share. Before correcting during the coronavirus scare, it hit a high of $968.99 on February 4th, 2020.
That is a profit for those that bought at the IPO price of 5,599.94% over ten years!
Even if you see the sharp run up to that high as a massive short squeeze and expect TSLA to correct back from that, the simple fact is that it is the kind of stock that every investor dreams of owning.
So, how do you spot the next TSLA?
Investing in early-stage, disruptive type businesses is a risky proposition, but the rewards are such that it is still a tempting one. Adopting a few simple attitudes and strategies and knowing what to look for can increase your chances of success.
Follow the Story
If you look at stocks like TSLA that have rewarded early investors with massive returns, they generally have one thing in common.
They are what is known as “story stocks”. They tap into a big theme that is easy for people to understand. In Tesla’s case, that was the desire of consumers to get away from fossil fuels and look for a “clean” alternative to gas-powered cars, but there are plenty of other examples.
Amazon (AMZN) and Google (GOOG) grew as the internet took over our lives. Netflix (NFLX) positioned itself to take advantage of the shift in the way we consume media entertainment, Facebook (FB) foresaw the ubiquity of social media. As hard as it may be to remember now, all of those companies had their doubters early on.
Anyone of a certain age probably has a story of the person who told them that the internet was just a fad, or that Google offering their service for free to consumers would be their downfall, or that small screens would never be as popular as going to the movies.
The story, however, was stronger, and one of the keys to finding the next Tesla is understanding when that is the case.
The cynics will no doubt point out that for every Google there is an Ask Jeeves and for every Facebook there is a Myspace. That is true, so obviously, the story in itself isn’t enough. There are a couple of other things to keep in mind.
The Product Matters
Even Tesla’s fiercest critics will admit that the cars are great, and that is a main reason they’ve continued to grow, even as more conventional car builders have released their own hybrids.
An early study of Tesla buyers came up with the stunning fact that “Individuals that own a McLaren supercar are the most likely to buy a Tesla, followed closely by Lotus, Ferrari, Aston Martin, and Maserati owners.”
Clearly, Tesla buyers aren’t just motivated by the desire to be “green”.
Many buyers fall in love with the “supercharged go-cart” feel of a car with direct, gearless drive and a powerful electric motor, and the technologically edgy, innovative, luxury branding also has its own appeal.
All of that comes down to a simple truth. The product matters.
To continue the analogy with Google, they succeeded because they offered the best search engine, just as such things became an indispensable part of our lives. If you are looking for the next Tesla, you have to find a company that is doing the same thing in a different context.
Elon Musk is a controversial figure. At times, he has been perceived as a liability to the company and has gotten in trouble with the SEC in the past, but there is an upside to him as the leader of a company too. He is passionate, innovative and driven, and, more importantly can communicate those things to others.
I am not just talking about potential buyers of the cars here. It is also essential in the early days of any company that those things can be communicated to potential investors. Car manufacturing is a capital-intensive endeavor, and without the ability to do that and raise the necessary capital, Musk would just be another techy with a dream.
The capital-intensive nature of the car business leads us to the next thing to look for…
Barriers to Entry
Being in front of a story, having a great product, and having the right kind of leadership are all important, but if it is easy for others to do what you are doing none of them will matter.
A current example here would be cannabis stocks. Growing cannabis isn’t all that hard, and as of now there is nothing proprietary about the methods of doing so, nor the processing of the product. As long as that remains the case, every public company in the business is vulnerable to a host of small entrants to the market. That is why so many stocks in that field, despite being part of a compelling story, have tanked.
Tesla is a winner right now in this area on two fronts. Their cars are technologically advanced, which makes it harder for competitors to match the quality of the product, and they are in a business that needs a lot of upfront money to get started.
That money is a lot harder to raise when you are talking about taking on an established market leader like Tesla, so, they can remain dominant in the performance luxury EV space for a while.
If you look for all of the above, you have a chance of finding the next Tesla, but there is another thing to consider, too, your investing strategy.
The most important thing to remember here is that even if you find a stock that fits all the criteria, it may still not work out. Sometimes, the fundamental story that led to your pick can change; consumers are fickle. Or, maybe the company is just a bit ahead of its time. Many of the original dotcom boom companies that went belly up were trying to do something that others are doing very successfully now.
When you understand that, it is clear that diversification is important in this kind of investing.
Once you identify a story, investing in multiple companies that can benefit from it makes sense. Among your picks, you will undoubtedly get some failures, but a return of over 5,000% on a hit pays for a lot of misses.
So far, I have looked only at long-term investing in innovative companies, but there is another side to the Tesla story that is worth considering.
Very often, a company such as that described, with the leadership described, will attract a great deal of negativity. Even if you miss out on the initial opportunity, that can lead to some very attractive entry points.
Back in September of 2019, for example, Tesla was the subject of a great deal of negative headlines as a result of a now forgotten lawsuit. At that time, I wrote this piece on Nasdaq.com, pointing out that the underlying Tesla story was still intact, and weakness on those headlines was a good buying opportunity.
Over the next four and a half months, TSLA did this…
That turned out to be a decent call, but the move up was exaggerated by something worth considering from a timing perspective.
Following those negative headlines, the already highly shorted TSLA was sold short even more. That led to a situation where a “short squeeze” was all but inevitable.
As somebody with a dealing room background, I can assure you that there is nothing traders love more than the opportunity to punish bad positions, whether they are “long and wrong” or “short and caught”. A good squeeze is a self-perpetuating thing. The more wrong positions are squeezed out, the bigger the move, which squeezes out more wrong positions, etc., etc.
So, if you are considering investing in one of these disruptive story stocks later in their existence, look for a large and growing short interest as a possible entry signal.
Finding the next Tesla isn’t easy. If it were, we would all be owners of TSLA with a cost basis around $17. It is, however, possible, and if you adopt the right strategies and go about it in the right way there is a good chance that you will find something that gives the kind of eye-popping returns that TSLA has shown.