We have discussed at length the criteria used by successful value investors, however, there are several important areas they avoid. I’ll describe two today: glamour shares and chartism.
Take Tesla, with a market capitalization of over $1,150bn. That is many times more than Ford (MCap $81bn) which produces 5m vehicles per year, turnover of $160bn and billions in profits in a normal year. It’s also more than General Motors (MCap $93bn), 7m cars and profits after tax of $5.6bn Tesla is priced at 35 times sales and 375 times profits. It sold 0.5m cars in 2020.
We’ve seen this sort of thing before, for example, internet stocks in the late 1990s. A combination of over-excitement, the obligation of index trackers (and closet index trackers) to buy those shares that have risen (with small free floats) pushed prices to extreme levels. The companies had untested business models and no profits.
Tesla at least has a good business model and profits, but there a hundreds of Tesla wannabes that lack revenue or profits, e.g. Rivian, priced at over $100bn.
Investors need to properly consider the possibility of market entry, competition and the introduction of substitute products. The German car makers, let alone the American veterans, Chinese and Japanese makers are going to give Tesla and Rivian a good run for their money soon.
Even well established companies can be poor investments. Companies such as Diageo, Intel and Unilever are good companies, with excellent financial performances and ar
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