A few weeks ago, I was traveling up the east coast from Baltimore to upstate New York. I wasn’t too crunched for time, so I decided to make a pit stop in Philadelphia for one of their world-famous cheesesteaks.
If you’ve ever done the cheesesteak thing in Philly before, you’ve already heard of the staples; Pat’s, Geno’s, and Tony Luke’s are well known and always have lines out the door, but it’s fair to say these tourist traps aren’t necessarily the best the city has to offer.
John’s Roast Pork might be a shoddy little shack in a questionable part of town, but this is hands down my favorite spot to go for cheesesteaks whenever I’m in Philly. There’s a debate to be had for other contenders, but if one thing is for certain it’s this; If the building looks like it’s about to collapse and the place is packed with locals, you know it’s the food (not the hype) that’s holding the roof up.
Of course, this all might seem irrelevant to investing, but I can tell you that looking for the best cheesesteak in Philly is actually a lot like looking for high upside and undervalued stocks. You can either get in line with a bunch of other tourists, or you can sidestep the hype and pick out the diamonds in the rough.
Pro Tip: Don’t Be a Tourist (Even if You Are One)
Without fail, the market always has a few tourist stocks/investments each year that hog the lion’s share of Main Street’s attention.
3D Systems Corp (NYSE: DDD) is one good example from a ways back. The media was hyping up 3D printing as the next revolutionary manufacturing technology and investors went absolutely ham on $DDD and a few of its peers.
The stock exploded over 1,000% in a matter of months, only to crater right back down soon after, with roughly a 90% value cut when all was said and done. Unfortunately, by the time most people heard of 3D Systems, they were buying way at the top.
Yet while many market tourists were haphazardly gambling on the biggest bubble of the year, a much more established and overlooked manufacturing technology was setting investors up for stable long-term gains.
This was this same year (2013) when we began recommending a basket of 20 different robotics stocks in my Technology and Opportunity investment advisory letter. Three out of every four of these stocks ended up in the green, with multiple triple-digit winners, ranging between 110% and 150% returns.
These stocks weren’t flashy, and they weren’t making headlines. The story wasn’t particularly sexy, but the companies were good at what they did. They sold useful products that were consistently in high demand, and their investors benefited immensely.
This pattern, though, is just one example of many. Time and time again, I’ve watched Main Street investors fall for market hype only to get burned shortly after they got in.
To be totally clear, this doesn’t mean it’s always a bad idea to invest in emerging new trends or exciting technology. If you get in early enough, you can reap some incredible rewards, but the reality is that by the time the mainstream media jumps on board, it’s usually a good time to bail.
Whether we’re talking about dot-com stocks, Bitcoin, or 3D printing, the media hype machine is notoriously reliable in its ability to create bubbles around emerging technology. Investors can ride this cycle for their benefit, and we do that plenty, but it pays big to know when it’s done.
This Bull Run Is Over
There’s a lot of uncertainty in the market right now regarding what’s been a record-long bull run, spanning over a decade. Expectations about broad equity performance for the remainder of 2020 remain mixed, with some analysts now convinced this is the beginning of the end, and others screaming their lungs out to “buy the “****ing dip!”.
Personally, I am erring on the side of caution with my recent investment decisions, but the truth is no one knows for sure what will happen. We are in uncharted territory right now, and I assure you that the people who you should trust the least are those who try to convince you they know for certain how the macro story plays out.
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That said, there is at least one true “tourist stock” right now that I think it’s safe to say the bull run is over for. I last warned about this stock about a month ago before it cratered 27% in just over a week. Now, it is looking increasingly certain that its hype frenzy is finished.
If you haven’t figured it out already, I’m talking about Tesla Inc. (NASDAQ: TSLA), easily the most talked-about stock so far this year. This company’s runup was dominating headlines in January and February, but now you can practically hear the crickets.
Unfortunately for bulls, Tesla’s news cycle has shifted from wildly positive to catastrophic over the last couple of weeks, with two major narratives overshadowing previous glowing optimism.
The first narrative surrounds the company’s much-anticipated expansion into China. Shortly after opening its new Gigafactory in the region, Tesla was blindsided by the novel coronavirus (COVID-19) outbreak, which sent much of the country into lockdown. Model 3 deliveries were delayed, and the company was forced to issue a warning on guidance for the quarter.
COVID-19, however, was not the only issue that would plague Tesla in its expansion efforts. China registration data released in February, from the state-backed China Automotive Information Net, has indicated a significant demand slump, even prior to the impact of the coronavirus.
To top it all off, Tesla was hit with another headwind this week, as customers in China were revealed to have been given outdated hardware components relating to the company’s “Autopilot” system. According to the Nikkei Asian Review, there are now calls to boycott the company from angry customers.
The second narrative overshadowing Tesla’s bull case, though, comes not from overseas, but from its competition back at home in the U.S. Earlier this week, General Motors Company (NYSE: GM) unveiled its plans to pivot heavily to electric cars, putting Tesla on notice.
Notably, GM has promised to bring to market new battery technology that will offer 400 miles of range or more, as well as accelerated charge times. For perspective, Tesla’s longest-range offering (Model S Long Range) peaks at 390 miles. The standard range of a Model 3 is just 250 miles.
While GM doesn’t intend to commercialize the technology until next year, it’s definitely a shot across Tesla’s bows as far as the valuation case is concerned. If GM can not only compete with Tesla on battery technology but can also surpass it, the latter company’s hyper-growth, dominant EV-maker story falls apart.
Digging into the numbers a bit, Tesla currently trades at 5.25x sales while GM trades at just 0.32x. GM also offers investors a 4.82% dividend yield, while Tesla has yet to prove it can even turn an annual profit.
Tying this all back to Philly’s famous cheesesteaks, Tesla is like Geno’s, and Tony Luke’s where all the tourists end up wondering what the heck all the fuss is about, while General Motors is John’s Roast Pork, where those in the know can escape the hype.
Until next time, Jason Stutman
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