Executing a Squealing 180-Degree Turn

Hello, Fellow Navigator.

I can’t kick Tesla Inc. (TSLA) out of the Magnificent Seven. I don’t have that kind of power. Besides, that moniker was just a throwaway term that Bank of America strategist Michael Hartnett used to describe the seven stocks leading the market higher last year.

Hartnett was playing off the title of the 1960 shoot-’em-up Western, and because financial journalists tend to be mentally lazy and in constant need of cute nicknames (FAANG, BRICS, et al.), it just sort of stuck. It became “a thing.” 

The irony? 

Hartnett didn’t coin the term as a compliment. It was a warning that the market’s gains were too dependent on a small number of stocks, which risked inflating a mini-bubble in large-cap tech.

But I digress. 

Let’s get back to Tesla. 

The leading maker of electric vehicles is having a hard time of late. Its shares are down about 30% in the past month, down about 40% from their 52-week high, and down by more than half from their 2021 all-time highs. Just look at this nasty chart…

So, what happened? 

How did everyone’s favorite company run by everyone’s favorite tech visionary/comic-book villain fall from grace?

Is Elon Musk Stuck With a Pet Rock?

Like shutter shades sunglasses and mullets, it turns out EVs were just a fad. 

Earlier this week, Todd Buchholz, former White House director of economic policy under President George W. Bush and managing director of the hedge fund Tiger Management, wrote:

Despite Tesla… Chief Executive Elon Musk’s entrepreneurial brilliance and billions of dollars in U.S. government subsidies to support EVs, it appears that consumers still prefer to drive to a gas station for a five-minute fill-up than to retrofit their garage and suffer the range anxiety that comes from hunting for a charging station in the parking lot of an abandoned shopping mall. J.D. Power reports that 21% of public chargers do not work in any case…

The evidence is rolling in fast. Earlier this month, [rental car company] Hertz, which purchased 100,000 Teslas to great fanfare in 2021, executed a squealing 180-degree turn and began dumping one-third of its EV fleet, taking a $245 million charge against its earnings. Its pledge to buy 175,000 EVs from GM will likely go up in smoke, too.

I thought about buying a Tesla a few years ago. I really did. The cars are beautiful and they’re a pleasure to drive. 

But then I stopped to consider where I actually go…

The thought of looking for a charging station on the road to Colorado, in the desolate Texas panhandle where there are more tumbleweeds than cars, made that a nonstarter. 

I imagined myself stuck on the side of the road with a dead battery and three screaming children. That quickly put my EV dreams to rest. 

Now I drive a massive gas-guzzling SUV, which my three screaming children have already half destroyed.. Once they finish the job and I’m on the market for a new car again, would I consider giving an EV another look?

The Hard Road Ahead

Maybe. But not unless battery range improves significantly and charging times drop further. I can be in and out of a traditional gas station in less than five minutes, including a bathroom break. It’s really hard to give up that convenience. 

Let’s circle back to Tesla. It’s important to remember that this is still the fastest-growing automaker in America. Vehicle sales were up a truly impressive 40% in 2023. But the consensus from Wall Street is that growth is likely to dip closer to 20% this year and continue to slip as the company matures into something that looks more like a “normal” automaker. 

And there’s a problem with that: Automaking is a terrible business to be in. 

As Freedom Capital Markets auto analyst Mike Ward recently told Barron’s, it’s “capital-intensive, labor-intensive, competitive, regulated, cyclical, and low growth.” 

Even if Tesla maintains its margins – which will be difficult in a mature, brutally competitive, and saturated global auto market – we still have the issue of valuation. 

The stock trades for 6.63 times sales and close to 60 times earnings. To justify multiples like those, you need to assume that Tesla’s high-growth phase will last for decades. 

Ask yourself: Does that seem likely?

Of course not.

More broadly, rising anti-ESG sentiment – which is something we follow with keen interest here at The Freeport Society – is starting to hurt Tesla.

The incessant pressure by governments, think tanks, and even Wall Street itself to push environmental, social, and governance activism over profit was a major gift to Tesla as a profitless fledgling startup. Now that this sentiment is shifting, rank-and-file investors are pushing back against ESG mandates. They have the audacity to actually focus on profit over political fads!

It’s about bloody time!

Even if ESG wasn’t a ball and chain around Tesla’s ankle, I wouldn’t invest in it. There are far more profitable investment opportunities in companies that never got swept up in the ESG hysteria. As of writing, we are targeting five of them in our Freeport Investor model portfolio (Freeport Investor members can log in here). To learn how to find out which stocks they are, and about our other investments, watch this special presentation now.

At The Freeport Society, we don’t pander to the woke agenda. Instead, we stay focused on the fundamentals that made America the great country it once was: hard work… innovation… and free markets. 

And with The Freeport Investor, we help you find investments that help you grow your wealth amid the chaos.

To life, liberty, and the pursuit of wealth.