Should I Buy Shares in Tesla, and ShareSoc Seminar Report

Should I buy shares in Tesla, or perhaps short the stock?  This thought was prompted by the recent large jump in the share price which has made the company worth more than Ford, General Motors and BMW put together. But there is still a considerable short interest in the company based on the fact that the financial ratios look far fetched and are discounting a lot of future growth. Plus of course the doubters worry about the leadership of Elon Musk.

The technology in Tesla cars is brilliant (I have had a test drive of a Model S) and is claimed to be way ahead of competitors. But other auto makers are fast catching up. Announcements by the UK Government that no diesel, petrol or hybrid vehicles can be sold after 2035, or even 2032 as the UK seems to be making decisions on the hoof on this matter, and by EU directives that promote the sale of zero emission vehicles has meant that everyone has realised the future is electric. That’s even if there are doubts about the grid capacity and how people will recharge them. As a result there are plenty of new electric vehicles from major car manufacturers being announced.

But I have decided not to purchase or short Tesla shares. There is one simple reason why. It’s basically a bet as to which car manufacturer will end up the most successful and make real money as a result. It’s not even a “binary bet” as there are many horses in the race. I simply have no clue as to which will be the winners or losers. So it’s not the kind of investment I like. It’s for speculators not investors.

There was a very relevant quotation repeated by Kate Burgess in the FT yesterday on this subject. Apparently Warren Buffett said “The wise bet in the early days of cars was to short pony traps rather than try to pick the winners”. So sell Shell and BP perhaps, although that might be a simplistic analysis as they are involved in gas and plastics production also. But you should disregard BP’s claim to be zero carbon by 2050 – it’s only window-dressing. Instead buy software companies and battery manufacturers or those helping to develop automated vehicles such as AB Dynamics (ABDP).

For more analysis of Tesla you could also read the latest edition of Shares magazine who have an article headlined “Why Tesla shares can’t continue to motor”. It covers the arguments for and against the company in some depth.

A second reason for not investing in the company is that this is clearly a stock that is very heavily researched by institutional investors, even if they have ended up with contrary opinions. How could I as a private investor without a big team of researchers behind me hope to come to better conclusions? I may find it better to simply rely on funds/trusts who are holding the company (Scottish Mortgage has a big stake in Tesla for example). They can also follow the company closely when I cannot.

I find it easier to make money as a direct investor in companies in smaller or mid-cap stocks. I often get wrong-footed by the changing views of big company analysts.

Which brings me onto the subject of the ShareSoc seminar I attended on Wednesday (12/2/2020). These events focus on smaller companies so they tend to be a very mixed bag. I will give some impressions of the companies presenting this week:

DX Group (DX.): This is a parcels and document delivery service. In 2015 it hit difficulties after a failed strategy and the next two years saw big losses. It’s been in turnaround mode since and is at least making profits now on an EBITDA basis. But bottom-line profits and positive cash flows are still in the future. They seem to be investing a lot in improving IT support and in other areas to improve quality of service which seems to be the only thing that might differentiate them from competitors.

My conclusion: insufficient differentiation from competitors and still weak financial fundamentals (e.g. low current ratio even excluding subscription liabilities) so the future may be bright but is it really “well-placed…..” as a FinnCap note on the company says. Document delivery is a declining market and I doubt they can fix that, and the freight market is fragmented with lots of competitors. The management who presented made a good pitch and they have experience of turning around a similar business so there are some positives while parcels will always need physically delivering but there are too many negatives at present I suggest. But some investors like recovery stories.

Diaceutics (DXRX): This company is a data analytics and implementation services company which services the global pharmaceutical industry. It provides diagnostic services which are very important for developing and applying personalised treatments, or “precision medicines” as they are sometimes called. It is primarily service based, with projects being sold to pharma companies but is it also now developing a “platform” which will contain patient data. This is effectively a “big data” model which is one of the hot buzzwords of late.

The presentation was short on financial information – like a lot of those from pharma companies the approach was to sell you on what they can do to cure the millions of cancer patients by developing better treatments. It’s the “gold at the end of the rainbow” syndrome. Looking at the financial profile they are making profits but the prospective p/e is sky high. Clearly punters (or should I say investors) in the shares think they will be a winner.

But I can’t say I was convinced by the presentation. There are also other companies that seem to be developing platforms to hold/analyse patient and drug data such as Open Orphan and Renalytix AI plus no doubt some US organisations. I would need to get a much better understanding of what they were developing and how it was differentiated from competitors, before investing in the company as it was certainly not clear from the presentation. There was also no indication of how they would make money from the new “platform” while I don’t generally like project based businesses.

SDI Group (SDI). Formerly called Scientific Digital Imaging, this is a company I hold but had not seen them present before. The company is a conglomerate of small technology businesses which it has acquired in the last 5 years (11 in all). All the acquired companies are profitable. Mike Creedy, the CEO, was the lead speaker and he is clearly an energetic person. He spoke rapidly.

The business model is similar to Judges Scientific – buying small companies in niche sectors cheaply and then letting them run independently with the management retained. Only treasury functions are centralised.

They like to buy businesses on 4 to 6 times EBIT and have done placings to finance the deals. Private shareholders can be left out as they don’t have time to do open offers although they have used Primary Bid to raise money in the placings.

They don’t do significant business in China where they operate through distributors which is a common question of late. The company has no significant patents or other IP.

The company has been widely promoted to private investors and hence has become highly rated. Only recently has the share price fallen back slightly, but it still reflects a lot of growth expectations. Perhaps the key question that comes to mind is “how many small companies can be acquired before the whole company becomes unmanageable”? There does not seem to be much synergy between the acquired businesses so the company is really a financial construct that needs to keep acquiring to grow profits. Using highly rated equity to buy more lowly rated companies is a good way to grow profits. But other than that I did not identify any concerns.

NVM (Northern VCTs). Charles Winward then spoke about the Northern VCTs who are currently raising more equity. The Northern VCTs are managed by NVM who were recently acquired by Mercia. I hold shares in the Northern VCTs and have written about their past performance previously.

Mr Winward covered his background in early stage development capital which is now important with the changed rules for VCT investment. He was also a director of Tracsis for a number of years which has been a very successful small cap technology company which I hold. Apparently it was not always a smooth ride there, which is news to me, but which reflects the typical problems of early stage businesses.

He suggested that the returns on development capital were improving – it is no longer an area in which to lose money. Comment: this probably simply reflects the valuations being put on early stage companies when they are still loss-making rather than some great improvement in profitability. Hope is being valued highly of late.

The valuations of Tesla (who have just raised another $2 billion via an equity placing) and Diaceutics are a reflection of the current market view of the future prospects of technology companies.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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