Is Trader Joe's overrated

"Tesla in the S&P 500 - that's just the tip of all unreasonableness"

The stock exchanges are booming. However, the cheap money has created huge distortions. David Trainer from New Constructs worries about the "seduced Robinhood babies", considers Tesla to be completely overrated and warns against index investments.

Covid-19 crisis or not. It no longer seems to play a role in the international financial markets. Investors there are inspired by the unbelievably massive monetary and fiscal stimulus measures all over the world, by the hope of a successful vaccination campaign in the shortest possible time and by the prospect of an “inflationary boom” like 100 years ago. They are more confident than they have been for a long time, are expecting a rapid economic upturn, booming consumption, and significantly increasing company revenues and profits in the coming months, and for this reason the prices on the stock exchanges seem to know no more boundaries.

Small speculators cause exaggerations

However, this does not apply across the board. David Trainer, for example, identifies individual areas and segments in the financial markets in which, in his eyes, there are uncanny exaggerations. The CEO of the research house New Constructs, based in Brentwood in the American state of Tennessee, argues, “The price development on the stock exchanges has largely decoupled from reality. In an environment characterized by unbelievable liquidity, many young, inexperienced investors chase crazy trends and stocks with strong momentum, valuation does not matter. 20 years ago the E-Trade or Robinhood babies didn't even exist, today we have 15 million small speculators. "

In fact, discount and securities brokers such as E-Trade or Robinhood give “securities trading the impression of an online game”. They lure many inexperienced, virgin private investors into the markets with supposedly cheap offers and the prospect of seemingly quick and easy money. Easy-to-use investment recommendations and comments in newsletters or online forums, the sale of fractional shares or almost barrier-free access to highly speculative options contracts round off the whole thing, as does Tesla's stock split. Inexpensive "entry-level offers" are intended to "democratize" investments for the small wallet as well. It could hardly be more seductive, but also more devious.

Caution, legal front running

"In fact, it is a set game," says coach. Institutional investors analyze the security orders of naive private investors before they go on sale and anticipate them. “The high-frequency traders are legally front-running, and in this way they achieve high and secure returns,” he explains, not surprising that no one is doing anything about it. "Because the stock exchange providers benefit from it by living very well on the bubbling commissions due to the high turnover in the markets, and the other institutional investors such as insurance companies and pension funds are also doing well in booming times." The American Securities Commission (SEC) recently fined Robinhood a million euros for opaque behavior, and the Massachusetts Securities Commission seems to be doing something about the carelessness that is practiced there.

However, “gamification” and front running are probably just the tip of the iceberg. Because there is also the price development of the shares of companies that are streaming en masse to Wall Street. «The issuers are deliberately issuing too few papers. With this trick they create an artificial shortage, so that the prices go through the roof immediately after the IPO due to the given demand », explains David Trainer to the astonished interlocutor and in this context also points out the strange role played by an exchange traded person Index fund plays a role. This reflects artificial interest in the new issues because he has specialized in investments in newcomers and is forced to buy their securities regardless of the operational development. "This perverse mechanism is self-reinforcing as long as the boom continues," explains the expert, using the example of Airbnb and Doordash to make the consequences clear.

Doordash - a "ridiculous business model"

The shares of both companies recently went public - and both are running hot, although the basic requirements could not be more different. “Airbnb has a real business model that is similar to the hotel industry. It exposes “hidden values” in homes, second homes, and so on, and that's good. But at this level the rating reminds me of the tech bubble 20 years ago, it's unsettling. " The company would have to double or even triple its sales in the next five years, at the same time come out of the red and move into the profit zone. In addition, it would have to capture at least 10% of all housing brokers worldwide to justify the current share price. "It's almost impossible to do."

With the American food delivery service Doordash, the expert becomes even clearer. «We call Doordash the most ridiculous business model of 2020. If you look closely, it is not at all sustainable. The company has practically never made a profit, and I don't think they will ever be able to. This is not a profitable business, or have you ever seen a pizza delivery boy who has become a millionaire? " And even if it did, what would keep restaurants from taking it into their own hands? Doordash's stock is said to be “priced” as if the company would dominate 120% of the relevant market in the future. The company is the “wework” of the food delivery service segment, argues Trainer emphatically, and urgently recommends private investors to stay away from it and not to be taken advantage of by “the greed of Silicon Valley and Wall Street”.

Tesla in the S&P 500 - a tragedy

And now, after he really got into a rage, the rhetorical head of the analysis house leads the conversation straight to his favorite topic, namely the electric vehicle manufacturer Tesla. "Tesla is the most dangerous stock of 2020, and its inclusion in the S&P 500 index only shows how ruthless the investment environment has become in these times of ultra-cheap money," rumbles the Tennessee man. It is a tragedy that the index committee of the S&P Dow Jones indices fell for the fad and came to this decision, he says and warns of the consequences. "This act is the sign on the wall that the incredible upturn in Tesla's share price may soon be over, and that also poses a risk for the index."

David Trainer’s logic is pretty simple. After the enormous price gains of the past few months, Tesla shares are entering the index at the absolute height of the hype, with maximum demand for securities on the part of investors and at the highest valuation level to date. The manufacturer of electric cars has made slight profits in the past few quarters, but primarily through the sale of one-off regulatory credits to other automakers. This is not a solid source of income, as these companies will soon no longer be dependent on it as soon as they produce their own electric vehicles on a large scale.

Tesla's earnings potential overestimated by investors

Earnings per share required for a PER of 16 *
Current / estimated earnings / share

The listing of the Tesla papers is now so high that the company would have to dominate practically the entire market for electric vehicles in 2030 in order to ever do justice to it. He has considerable doubts about that, because “Tesla is losing market share in Europe, the 'first mover advantage' has disappeared, the traditional competitors in battery technology are rapidly catching up, they are investing much more, they have economies of scale and considerable experience in mass production in terms of quality high-quality vehicles, Tesla's self-driving systems are no better than others, and potential additional business in the insurance or energy sector is neither unique nor essential, ”argues the man of numbers.

He also comes across Elon Musk's compensation plan, the structure of which is reminiscent of false incentives that ultimately contributed to the collapse of the pharmaceutical company Valeant. The Tesla boss is motivated to take excessive risks, strive for growth at all costs and focus on price-driving maneuvers instead of building a long-term profitable company.

Index investors like the SNB distort the markets

In the inclusion of Tesla in the S&P 500 index, Trainer sees “only the tip of all unreasonableness”. Tesla will be the “heaviest” company ever to be included in the S&P 500 index, but it will also be the one with the lowest profitability. “In the past, the stocks of solid, mature, profitable companies have risen above all, and from now on the stock market barometer will probably be more volatile and driven more by momentum,” fears Trainer, who doesn't think much of index investments. “Passive investors such as the Swiss National Bank distort the markets because the market capitalization-based indices are increasingly concentrating on the securities of large companies instead of targeting capital to those who use it most efficiently and who earn the most. »

He warns of the consequences of strong price setbacks at Tesla, advises against investing in highly rated and hyped papers such as those of Spotify, Beyond Meat or Carvana and prefers to rely on stocks of companies whose long-term earnings prospects he judges positively by traditional standards. These include, for example, the shares of the chip manufacturer Intel, the insurer Allstate, the chocolate manufacturer Hershey, the real estate developer Meritage Homes, the titles of the hospital groups Universal Health Services and HCA Healthcare, those of the auto parts dealer Standard Motor Products and those of the nut and dried fruit specialist John B. . Sanfilippo & Son.

Tesla - worth more than the entire industry?

Market capitalization * in billion CHF