As Al Root noted in Barron’s November 25, 2020, Tesla Stock Rises Again, Creating Another Problem for Index Funds, at the current valuation Tesla will be entering the S&P500 Index with a market cap roughly equivalent to Warren Buffett’s Berkshire.  As Al explains, this will require index funds to purchase $70b of Tesla stock. The stock has risen 586% YTD with 41% of that coming post the announced inclusion.

At over 900x earnings, we cannot help but wonder if this is a poor time for a vast swath of Americans using index funds to be allocating such a large chunk of their money to Tesla. While Tesla has done a fantastic job capturing the imaginations of many, the charts below compare Tesla to BMW, one of the most established and profitable car makers in the world.

One does not need to be a believer in value investing to see the possible risks in Tesla’s current valuation!

Tesla vs. BMW: Market Cap, Revenues & Profits

TSLA v BMW Value investing risks in Teslas current valuation Nov 2020

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  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

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November 25, 2020 |

November 25, 2020

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