In March of this year, I asked Eugene Groysman why he thought Tesla(NASDAQ: TSLA) was the Apple (NASDAQ: AAPL) of the auto industry. Eugene said, “Just like Apple, Tesla has an opportunity to revolutionize a market.” In April, three of our community members, Thomas Bethke, Mitch Roider, and Wayne Dahlke, also believed in the vision that Elon Musk has for this company.
After we posted the interview, Eugene’s investors saw their position in Tesla grow 36%. Since that time, though, it has been a volatile month with the stock shedding 20% of its value from those September highs. This month, I wanted to talk to Eugene to see if Tesla still has the potential to double.
You can view Eugene’s top 5 holdings, learn more about his strategy, and track his progress with monthly Performance Insights. Eugene is an excellent trader. When Eugene is considering to buy or sell a stock, he looks at the company first, regardless of sector, utilizing investment fundamentals as well as quantitative analysis. His average gain to loss ratio is 7.1 with a winning percentage 45% of the time.
Eugene's Marketocracy model portfolio has averaged 17.3% a year for 12 years. (Photo Credit:... [+]
Ken Kam: Good evening Eugene, how have things been going?
Eugene Groysman: Well this market certainly has me paying attention. It really forces one to look at the investments to make sure the fundamentals are sound. Warren Buffett was right when he said, “Only when the tide goes out do you discover who's been swimming naked.”
Ken: Wise words.
Eugene: They are. Because of the correction, I am making sure the fundamentals of each investment are solid. I want to make sure there are no surprises. There is no worse feeling than being blind-sided with surprise news that one was not able to predict. It’s important for people to know that I’m invested in Tesla, too, so I have a personal interest in making sure this is a good company. I’m eating my own cooking with this one.
Ken: It sounds like you looked at the fundamentals for Tesla. What do you see?
Eugene: I first bought Tesla about a year ago at around $150-$160 per share. Because of my strategy of re-balancing and paring when it goes over 5% of my portfolio, it looks like my break even point is $139. We have made money, and approached a double in about a year’s time.
Curbing Cars: America’s Independence From The Auto Industry investigates why a growing number of Americans are giving up their cars. This illuminating account of our changing automotive habits is available now for download.
Ken: So why do you think it’s struggled this past month?
Eugene: It’s the market. If it wasn't market forces, then I would be worried. That’s what systematic risk does; no one escapes. I guess one has to be clear in their understanding that Tesla is speculative. It is a volatile stock. The beta is 1.39, so that means when the market drops, it will drop even more. Look, it’s a company that has no earnings and no dividend, so one buys it believing it will go up in price.
Ken: Why would one buy a company that has no earnings?
Eugene: In Tesla’s case, the story is driving the price. The Model S was a success. The company was able to show that electric cars can be sexy. It was proven when the Roadster was able to go from zero to 60 in 3.7 seconds.
Ken: Wow! That’s fast.
Eugene: It is. Tesla’s cars compare favorably or better against the Porsche, Lotus, and BMW. What makes the drivability of car interesting is that the full torque is immediate, because there are no gears.
Ken: Not exactly your grandfather’s golf cart, is it?
Eugene: No, Tesla has already shown the viability of the electric car market. That is why I still think they’re a game changer.
Ken: What are the new models coming out? Are they gamechangers too?
Eugene: Tesla has a 2015 SUV called the Model X. I think it looks more like a crossover. The key for the success of their SUVs will be whether they will come out with a model that will be priced for mass appeal. They will have to compete with the Porsche Cayenne, the M-Class and G-Class from Mercedes. They did that with the Model S; they can’t survive if they are selling all of their models over $100,000. They have to reach the masses.
Ken: You keep saying you like the story for Tesla. Tell us more about that.
Eugene: Tesla understands that it’s more than just about the car; it’s about creating an electric car lifestyle. They’ve built 119 supercharger stations, with five near my home in Milwaukee. They will build more. You can fully charge your car in 30 minutes. They’re expanding their battery swap program where you can exchange your batteries for fully charged batteries. It will take less than the time to fill one’s gas tank. Recently, they announced that they’ll build a gigafactory in Nevada by 2020. Their goal is to build 500,000 cars a year from this plant.
Ken: So what is your portfolio strategy for Tesla?
Eugene: Every time the stock goes over 5% of my holdings, I’ve been paring it down until it’s under 5% again. I let the rebalancing strategy signal when I should take some profits. I have the same strategy for Netflix (NASDAQ: NFLX). I know my break-even point is around $139. The same strategy has my break-even point at $135 for Netflix. It’s a process that works.
Ken: What do you tell someone when they notice that Tesla has no earnings?
Eugene: Valuation is important for me, and I knew it had negative earnings. That is why I looked at their top line revenue growth to help make my decision. Their five-year revenue growth is 167% and 89% for the past year. That eventually has to go to the bottom line.
Ken: Where else are you seeing the earnings potential?
Eugene: They do have a positive EBITDA. Their gross margins have been positive for a few years now. They’re over 25% and far better than the overall industry. And something I like is that they’re operating cash flow just turned positive this past fiscal year. That’s good.
Ken: What are some warning signs you’re looking for?
Eugene: For me, it’s simply an issue of watching for a dip in the revenues. When the SUV comes out, I will be looking for guidance. Finally, it’s always about managing the cost basis.
Ken: Good work, Eugene.
Eugene: Thank you, Ken.
My Take
Eugene raises some really strong points. First, Eugene invests in companies that have a strong story, as he puts it. They are real companies that have real strategies for executing their business models. Next, he pays attention to the fundamentals to see if the business model is yielding the kind of results that will benefit his investors. Finally, he uses a re-balancing strategy that allows him to take profits when the stock price has gone up so much that it is over weighted in his portfolio. Eugene has a clear plan for his investors’ money, and that is why he is part of our Marketocracy Core Team.
Connect with Ken Kam on LinkedIn.
Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.
