Tesla shares head lower on disappointing earnings... Cisco tops analyst estimates... Tesla CEO compares company to Apple... Carl Icahn's latest letter...
It's been a rough day for our perpetual punching bag, electric-car maker Tesla.
The company lost $108 million in the fourth quarter (a loss of $0.13 per share) on $1.1 billion in revenue. While that's an improvement from the company's $0.33-per-share loss a year ago, it's still well below analysts' earnings expectations of positive $0.31-per-share earnings.
Tesla was expected to deliver 11,142 vehicles, but only moved 9,834 in the fourth quarter. The company said it wasn't able to deliver around 1,400 vehicles due to "customers being on vacation, severe winter weather, and shipping problems (with actual ships)."
The company sold fewer than 33,000 vehicles in all of 2014. CEO Elon Musk expects Tesla to sell 55,000 cars this year. For comparison sake, Ford sold more than 175,000 vehicles in January alone, according to data from auto-research firm Motor Intelligence.
Making matters worse for Tesla were its miserable sales in China, which the company expects to account for one-third of its sales. MarketWatch reported that in January, Tesla sold just 120 cars in China. In related news, the company lost its third senior executive in China in 12 months.
Tesla blamed its poor financial performance on the missed deliveries as well as one-time manufacturing problems and a stronger U.S. dollar.
Still, the company is going to spend lots more money...
Tesla is currently developing the new Model X crossover. That nearly doubled the company's fourth-quarter operating expenses to $336.5 million from the same period a year earlier.
Shares got clobbered on the news, falling as much as 9% in midday trading before recovering slightly.
DailyWealth Trader co-editors Brian Hunt and Ben Morris – who recommended selling shares short on January 13 – saw Tesla's lousy results coming from a mile away. On Thursday, they updated subscribers on the position...
When a "story stock" like Tesla has soared for years, it draws in huge public interest and becomes extremely expensive. At its peak, Tesla traded at 14 times sales. It was priced for perfection... and then some. Expectations were so high that only years of perfect performance could support the stock price.
But even great companies stumble from time to time. When they do, shares fall. And when a company that is priced for perfection stumbles, the share price often nose dives. Things don't have to get "bad" for this share price drop to happen. Things only have to get "less great."
As you can see from the three-year chart below, Tesla hit a short-term low of $26 a share in the summer of 2012. It then went on a huge run and reached a high of $286 in late 2014 (a 996% run). But now, the stock has formed a massive rounded top... which often precedes lower prices. Tesla's extreme overvaluation is acting as an anchor on shares.
Tesla is a stock-market darling. As Brian noted, it's an innovative company, and it has rewarded early investors handsomely. But today, the company trades at an obscene nine times price-to-sales ratio. Its market cap valuation suggests it's worth half of what General Motors is worth... even though it sold 33,000 vehicles last year versus GM's 2 million.
So... would you rather invest in a company that produces expensive electric cars and loses money every quarter, or the company that makes the hardware that allows the Internet to operate and generates $12 billion in cash flow?
We prefer the latter... World Dominator Cisco (CSCO), which just announced blowout earnings. Cisco generated $11.9 billion in revenue during the second quarter of fiscal year 2015. That's up 7% versus a year ago and topped analyst expectations. The company also earned $2.4 billion, up more than 70% from the $1.4 billion it earned in the same period a year ago.
As CEO John Chambers said in a statement...
[Cisco] saw the best balance of growth across all our geographies, products, and segments... despite a volatile economic environment.
Dan Ferris holds shares of Cisco in Extreme Value. We spoke to Dan's research analyst, Mike Barrett, about the company's earnings announcement...
Chambers believes the Internet of Things (IoT) – the act of connecting billions of devices and machines to the Internet – will be at least five times greater than today's Internet. That's a bold statement. But from Chambers' perspective, every company and industry is being forced to join the digital economy... whether they want to or not. His goal is to make sure this huge, growing market views Cisco as the provider of comprehensive solutions.
Cisco has realigned 40% of its workforce and replaced 30% of its managers in its quest to become the No. 1 IoT company... 75% of the Internet already runs on Cisco's routers and switches. But the company's future growth will come from helping customers build digital enterprises and move their IT workloads across the cloud without compromising security.
Tech companies routinely have to reinvent themselves. But World Dominating tech companies like Cisco (and Intel, IBM, and Microsoft) are in a class of their own because they routinely reinvent themselves and remain loyal to shareholders.
As evidenced by today's earnings, Cisco is generating huge amounts of cash. The company raised its quarterly dividend 11%. Plus, its share count is down 12% over the past five and a half years.
In yesterday's Digest, we asked how much you thought Greece leaving the European Union would hurt a dominant business like Apple. We pose the same question for Cisco. Our prediction: not much.
The company has raised its dividend every year since it began paying one in 2011. It currently yields around 3%. After today's 9% move higher, Extreme Value readers who purchased shares on Dan's recommendation in February 2011 are up more than 40%... and they're earning nearly 4% yield on their original purchase price.
One more note on Tesla... CEO Elon Musk said the company's market cap could rival that of consumer-products giant Apple in 10 years. Remember, this week, Apple became the largest company in U.S. history(with a market cap of more than $700 billion). Tesla's market cap would have to rise nearly 30 times from today's level. That means Tesla would have to reach the levels of ubiquity achieved by the iPod, iPhone, iPad, iMac, etc.
Of course, anything is possible... but Apple continues to pull further away...
In a new letter, billionaire and activist investor Carl Icahn – one of the company's largest shareholders – upped his price target for the company to $216. Just four months ago, Icahn had a target of $203 a share for Apple.
Icahn has been agitating for Apple to repurchase more shares. And his latest letter is no different...
We continue to hope that Tim Cook and Apple's Board of Directors, on behalf of all shareholders, take advantage of this dramatic market value anomaly and increase the magnitude and rate of share repurchases while this remarkable opportunity still exists.
Apple shares rose another 1% today to more than $126... The company's market cap is now $740 billion – still the largest in U.S. history (and growing).
In the January issue of Retirement Trader, Dr. David "Doc" Eifrig outlined the three things to look for in a great business: Does it produce something people want and need? Can it produce it with costs that leave positive cash flows? Is the business trading for a good price?
Apple is one of those businesses. Nearly 700 million people around the world use an iPhone. The first weekend Apple released the iPhone 6, it sold a record 10 million units. As we noted yesterday, Apple also earned $18 billion in the last quarter... more money than any other company has ever made in a single quarter. As Doc wrote...
Apple is in high tech. Its specialty is its focus on the details of design. The company puts more effort into design than any of its competitors. That design pays off. While it produces amazing high-tech products, they are relatively cheap to produce and generate big profit margins.
From its $86.8 billion in sales over the past year, Apple generated $22 billion in net income. That makes for a profit margin of 25%. And despite all this, Apple shares today trade for just 13 times future earnings. That's much less than the P/E ratio of 18.2 on the S&P 500. Deals like that don't come along often.
Companies like Apple and Cisco are Doc's favorites to trade in Retirement Trader. Doc focuses on selling put options on high-quality companies trading at good prices.
And as regular Digest readers know, his track record has been spectacular. That's why Retirement Trader received yet another "A+" grade from Porter in our latest Report Card. Doc's win percentage was an astounding 93%, with an average return of 9.7%. Put another way, if you traded along with Doc, you earned nearly 10% a year while only losing money 7% of the time. To put that in perspective, the world's greatest money managers are happy if their win percentage is more than 50%.
New 52-week highs (as of 2/11/15): Apple (AAPL), American Financial Group (AFG), Brookfield Property Partners (BPY), CME Group (CME), CVS Health (CVS), Esperion Therapeutics (ESPR), Altria (MO), Pepsico (PEP), PowerShares Buyback Achievers Fund (PKW), Constellation Brands (STZ), and Walgreens (WBA).
In today's mailbag, Stansberry Alpha co-editor Brett Aitken responds to a question about Porter's bearish stance and his trading strategy. Send your questions to feedback@stansberryresearch.com.
"Porter, I read and listen to your 'sky is about to fall' reports with great sincerity and interest. But I wonder, when you say you expect to see stocks drop 50% or more, do you mean all stocks, including precious metal stocks, commodity stocks that have already cratered, emerging market stocks, the whole universe of stocks?
"And how do you reconcile this view while at the same time recommending long-dated positions like those in the Alpha letter, which require gains in the underlying stock in order to really benefit on the call side? Put another way, would your current bearish view inform you to divest from such stellar holdings as Hershey, Wal-Mart, and McDonald's while you wait out the storm?" – Paid-up subscriber Marshall
Brett Aitken comment: It's true that in Stansberry Alpha we make the big double- or triple-digit gains as stocks climb higher and our call premiums soar accordingly. And of course, the put premium declines as stocks climb higher. But our strategy is twofold...
First, we want high premiums on the puts. We do this not only to finance our trade on the call option, but to also pocket a net credit upfront. We look for an initial net credit that represents a double-digit return on our margin requirement. That reduces our risk. And if we get put the stock, our entry point is lower than when we opened the position.
The best time to get higher premiums on the put is when there is some volatility in the market. We like it when the Volatility Index (the "VIX") – which acts as the market's fear gauge – spikes above 20. That can mean broadly across the market... or on individual stocks or sectors. Sometimes, a selloff on a stock may be warranted... But other times, the market overreacts. We use those circumstances to pocket healthy premiums on the put while buying the call at a cheap price. This results in a healthy net credit upfront... and sets us up for gains as shares trade higher.
Second, we only open Alpha trades on our highest-conviction ideas. So while some market sectors sell off, other sectors may do well. We love to make trades on the best businesses in the world... like Hershey, McDonald's, Microsoft, Intel, etc. We like elite, capital-efficient companies, companies with "trophy assets," and the highest-quality energy companies. These don't always move in tandem. And we like to take advantage of high-quality companies that have sold off. For example, there are some great bargains setting up in the energy sector, and at some point in the future, we'll have opportunities to open trades on some of the world's top energy companies.
By opening Alpha trades when the conditions suit each sector or company, we can reduce our risk on the downside. We also can increase the odds of success as we recommend a longer-term position that gives us time to let the trade play out.
As a matter of fact, in this month's issue – which hit inboxes earlier today – we recommended a trade on a company that fits the bill. We expect to make 116% on margin on this trade by September. You can gain immediate access to this trade with a subscription to Stansberry Alpha. Learn more by clicking here.
Regards,
Sean Goldsmith
February 12, 2015
