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My Top 2 Stocks: Tesla Motors and Target

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Today, electric-car maker Tesla Motors (NASDAQ: TSLA  ) and discount retailer Target (NYSE: TGT  ) are my two largest individual stock holdings. My positions in these stocks have grown over the years not because of stock splits, but rather because I've continued to put money behind them during dips in the stock prices. Until recently, Apple (NASDAQ: AAPL  ) was my largest holding by a long shot. However, we'll get to that later. First, here's a bit of history on when I made my initial investments in Tesla and Target, how they've performed since then, and how long I plan to hold them into the future.

Taking the plunge
Tesla Motors won my attention after the company's CEO Elon Musk came to speak at Fool headquarters in 2011. I had no prior knowledge of the business before meeting Musk, and honestly no intention of investing in an auto manufacturer -- a start-up EV maker, nonetheless. What changed my mind? I believed Musk was a disruptive innovator, and that Tesla would shake up the auto industry like never before.

When I finally decided to buy shares of Tesla, it was one of the most shorted stocks on the Nasdaq. However, Musk's company has passed many milestones since that time. In fact, it delivered its Model S sedan ahead of schedule, and later took home the academy award of autos when it's zero-emissions vehicle won Motor Trend's 2013 Car of the Year. Despite these achievements, the market's lack of confidence in Tesla isn't without merit.

This is because the Silicon Valley-based company is trying to find its way in an industry where economies of scale favor global giants such as Ford, Toyota, and General Motors. Then again, Tesla's CEO has an impressive track record of beating the odds. Musk was a co-founder of payments processor PayPal, which eBay (NASDAQ: EBAY  ) later purchased for a cool $1.5 billion. Meanwhile, his other company, SpaceX, made history last year after launching the first commercial spacecraft to reach the International Space Station.

As long as Musk is driving Tesla, I am happy to be along for the ride. Musk vowed to create not only the best electric vehicle ever built, but also the best performance sedan in the marketplace -- so far, he's done just that. But that's not all. With the help of ex-Apple executive George Blankenship, Tesla is hoping to change the way people shop for cars.

The company is opening mall stores to showcase its all-electric cars in high foot traffic areas around the world. This is disruptive in an industry in which traditional automakers rely on franchised dealerships for distribution. While the stock will likely remain volatile in the near term, I'm betting on Tesla's future revenue potential as the driving force behind widespread EV adoption. Of course, this isn't going to happen overnight, which is why I plan to be a Tesla shareholder for many more years to come.

Now let's look at my second-largest holding: Target.

On the mark
Target, was the first stock I researched, reported on, and purchased when I started working for The Motley Fool in 2011. Shares of Target were trading around $47 apiece at the time . The stock is up more than 20% in the past year to where it trades today at $67 a share. That's not a bad run for a discount retail stock.

In fact, the bullseye retailer is my second best performing stock pick ever, behind Apple (NASDAQ: AAPL  ) , whose stock I purchased in October of 2003 at just $23 a share. Apple would still be my largest holding today had I not sold my position in December to become a first-time homeowner. The stock was trading around $535 at the time I cashed out.

My near 10-year investment in Apple helped me put a down payment on a house. The reason I mention this is because in those moments you're grateful to be invested in the stock market. Unfortunately, it doesn't always play out that way. Zynga brought me back down to reality, and today it remains one of my worst performing investments to date.

So, how did I get it right with Target? I understood the business and liked management's decision at the time to purchase the leasehold interests of Zellers stores in Canada. For those unfamiliar, Target issued $1 billion worth of corporate bonds at the start of 2011 to purchase the Zellers locations with the intent to open 100 to 150 Target stores in the Great White North during 2013 and 2014.

Target's weighted average cost of capital of 8% at the time of the deal favorably compared to the chain's 10.6% return on invested capital. Fast-forward to today: The retailer stayed true to its commitment of opening its doors in Canada this year. Last week, Target opened its first three locations just outside of Toronto.

Target has so far hired 5,000 Canadian employees for its stores there and plans to hire another 27,000 workers by the end of the year. Marking the company's first expansion outside of the U.S., Target is set to open 24 stores in Ontario by the end of this month, according to Reuters. Moreover, Target hopes to have 124 new stores open in Canada by the all-important holiday shopping season in December.

How's that for international growth, eh? Costs tied to these store openings will continue to pressure Target's operating margins over the near term. However, this investment should pay off in big ways for Target down the road. Ultimately, I believe Target will be a core holding in my portfolio for a long time to come.

Making it last
Compound interest can beef up your returns over time. For this reason, and many more, I'm a long-term investor that doesn't mind sacrificing short-term profitability for growth down the road. Tesla and Target are my top two stock holdings, but our co-founder Tom Gardner recently revealed his top two stocks as well. For the names of that surprising pair of companies, just click here.


Read/Post Comments (3) | Recommend This Article (3)

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  • Report this Comment On March 12, 2013, at 2:53 PM, jimmy4040 wrote:

    Tesla's problem is that it doesn't matter how good the car is. It violates the profit model for automakers.

    If you walk into a dealership tomorrow and pay the sticker price in cash, the car maker gets almost nothing out of that. Car makers make their profits in two ways, from the relationship with the dealers, and from the captive financing arms. Tesla, being it's own dealer and having no finance arm, has no good path to profit.

    In fact, last year it was using customer down payments to finance part of it's operations.

    Enjoy it as a trade, but by 2015 it will either be bankrupt or have been taken private to avoid bankruptcy.

  • Report this Comment On March 14, 2013, at 5:38 PM, spawn44 wrote:

    I don't care to shop at Target. And Tesla is a souped up golf cart bought by save the earth idealists with aGOREaphobia holier than thou attitude because the CO2 they released was generated at a distance away, most likely a coal plant, which they tend to ignore

  • Report this Comment On March 15, 2013, at 5:57 PM, sachinkm100 wrote:

    No financial analysis nothing. Story needs to be backed by numbers. Is this any different someone recommending amazon at internet peak? Great company but is it the right price? All marketing BS!

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