Here’s why Tesla is up 60 per cent

Electric car maker Tesla (Tesla Stock Quote, Charts, News, Analysts, Financials NASDAQ:TSLA) has been screaming up the charts lately, helped by a well-received earnings report a couple of weeks ago. But for investors still on the outside looking in, the temptation is real, according to portfolio manager David Burrows, who says he’s staying on the sidelines for now.

“Tesla has been an absolute monster. We don’t own the stock, in full disclosure,” said Burrows, president of Barometer Capital, speaking on BNN Bloomberg on Thursday. “The stock peaked earlier this year at about $900 and consolidated over about nine or ten months and then only in the last two weeks broke out.”

“This is what happens when when a stock consolidates the way that this has with the kind of growth rate that they have, and so sentiment is obviously very positive and the reason for that is everybody’s making money — there is nobody who is losing money in the stock, other than the short sellers,” he said.

“There is a large short position against it, which is, of course painful for those folks. They’re getting squeezed in,” Burrows said. 

Tesla wowed the masses with its latest earnings, the company’s third quarter which sported beats of analysts’ consensus estimates on the top and bottom lines. Revenue rose 57 per cent year-over-year to $11.76 billion for the Q3 while net income was up an even bigger 139 per cent to $2.09 billion or $1.86 per share. The Street had been calling for revenue of $13.63 billion and earnings of $1.59 per share, according to Refinitiv figures.

The company lauded its strong operating margin in its quarterly comments, saying the 14.6 per cent for the quarter was better than its own guidance for the medium-term period. Tesla said the profitability came even as the average selling price for its vehicles dropped by six per cent as the company enacts a shift towards lower-priced cars.

“EV demand continues to go through a structural shift. We believe the more vehicles we have on the road, the more Tesla owners are able to spread the word about the benefits of EVs. While Fremont factory produced more cars in the last 12 months than in any other year, we believe there is room for continued improvement. Additionally, we continue to ramp Gigafactory Shanghai and build new capacity in Texas and Berlin,” Tesla said in its third quarter press release.

It wasn’t long ago that the criticism of Tesla was that both production numbers and profitability were sketchy. Delivering under 250,000 cars in 2018 and 367,500 in 2019, which was still paltry compared to the millions upon millions of vehicles churned out by the likes of GM, Toyota and Volkswagen. And Tesla was posting losses of $976 million in 2018 and $862 million in 2019. 

But by the end of 2020, vehicle production had crested half a million and the tide was definitely turning on profitability as Tesla was delivering quarter after quarter in the black, ending the year with net income of $721 million. 

Now, with those concerns in the rearview mirror, Tesla fans see an open road ahead and Tesla’s share price has shot up, rising from about $800 by mid-October to now over $1200. That puts the stock at a year-to-date return of about 74 per cent, while its two-year return is an eye-popping 1730 per cent.

Burrows says the prudent investor might want to look before they leap, but he seems just as respectful of the strength of conviction from Tesla supporters.

“I’d be a little bit careful, certainly it wouldn’t be at all unreasonable for it to pull back to $1,000 where it broke out before it continued higher.”

“But, you know, there are a lot of believers here and I wouldn’t want to fight the tape against it. Yes, it’s expensive, but it’s like a skunk works. There are all kinds of additional assets in this business other than just an auto business,” he said.

“So, if you believe we are in a strong market — and I do — and if you believe you want to own the leading stocks this is one you might want to take a look at. But you have to realize it’s going to be volatile and there are risks attached,” Burrows said.

Speaking to the devotion of Tesla’s followers, CNBC’s Jim Cramer said those investors identify with the company and its brand and will buy the stock because of that connection.

“There are stocks I call the anointed stocks, and the retail investor has decided it really doesn’t matter — retail investors say, ‘Look at that, I’ve seen two Tesla’s today, let’s go buy some Tesla,’ or they buy a fractional share of Tesla. They’re not buying fractional shares of other stocks,” Cramer said on CNBC’s ‘Squawk on the Street.’

“Retail investors are being driven a lot by what we would call ESG [environmental, social and governance]. They think, “I want to make a statement. I want to buy something that cleans the environment. So, the retail industry very oriented toward morals and ethics. It’s quite different from what we’re used to,” he said.