Tesla's (TSLA -1.92%) stock price is flirting with $600 per share -- a nearly 800% gain so far in 2020. The electric car juggernaut currently sports a market cap that's higher than Ford's, Coca-Cola's, and Disney's combined. Even some of Elon Musk's biggest fans are starting to wonder if Tesla shares are overvalued. Don't forget, Musk tweeted his opinion on May 1 that "Tesla's stock price is too high" ... with shares at about 25% of today's valuation!
With that in mind, we asked three of our Motley Fool contributors for stocks with better valuations than Tesla. They came back with Carrier Global (CARR 0.28%), D.R. Horton (DHI -2.53%), and PowerShares WilderHill Clean Energy ETF (PBW -1.79%). Here's why they think these are better buys.
Image source: Getty Images.
Carrier Global will benefit from the pandemic
Lee Samaha (Carrier Global): Although it doesn't attract the same level of interest as Tesla or electric vehicles in general, the heating, ventilation, and air conditioning (HVAC) sector is having a very strong year. Carrier is up a whopping 209% since it was listed in March, and its peer Trane Technologies is up 39% in 2020.
A large part of the reason comes down to the idea that HVAC will be a big winner from the COVID-19 pandemic. The argument works in three ways. First, stay-at-home measures have boosted investment in home improvement. For example, Carrier's North America residential HVAC sales were up 46% in the third quarter. The increase in sales shouldn't be seen as merely a one-off event because Carrier is likely to generate aftermarket revenue from these sales in the coming years.
Second, the pandemic is likely to lead to a heightened awareness of the need for clean, healthy buildings with appropriate filtration. That plays into the hands of the higher quality HVAC providers like Carrier.
Third, the industrial company's transport refrigeration solutions will assist in the distribution of vaccines that need to be refrigerated. Again, the benefit to Carrier is likely to go beyond the period of the pandemic because investment in global cold chain capability is a long-term plus for the company.
Trading on 20 times 2020 estimated earnings and with strong long-term earnings prospects, Carrier remains an attractive investment.
A beneficiary of a tight housing market
John Bromels (D.R. Horton): Considering that Tesla's price-to-earnings ratio is a jaw-dropping 1,194.6, it's not hard to find companies that boast more reasonable valuations. Even red-hot Shopify is "only" trading at 675.9 times earnings right now. But I'd prefer a company in the middle of a growth boom with a price-to-earnings ratio of just 11.3, a projected near-term pre-tax profit margin of 35% to 40%, and even a 1%-yielding dividend to boot. That company is the largest residential homebuilder in the U.S. by number of units sold, D.R. Horton.
As any realtor will tell you, existing housing inventory is in short supply right now, and sales are way up:
US Existing Home Inventory data by YCharts
That combination of low supply and high demand has pushed prices skyward. As a result, new construction -- like the kind offered by D.R. Horton -- is attractive by comparison. While building a new home usually costs more than buying one in absolute terms, new homes tend to be larger, so the cost per square foot is much less, on average. And since the pandemic began, buyers have shown a preference for homes with plenty of space indoors and distance from neighboring homes outdoors, features more likely to be found in new construction.
D.R. Horton is projecting a strong market for its homes through 2025. One potential problem: According to the Research Institute for Housing America, 7.1% of homeowners failed to pay their mortgages in September. Luckily, the Federal Housing Finance Agency just extended its moratorium on foreclosures and evictions to Jan. 31.
If that mandate isn't extended again, we could suddenly see a massive influx of foreclosed properties on the market in 2021. That would be bad news on many levels, including for homebuilders. If it happens -- and I hope it doesn't -- D.R. Horton's stock would probably take a short-term hit. Over the long term, though, D.R. Horton looks like a buy.
An ETF for EV-focused investors
Scott Levine (Invesco WilderHill Clean Energy ETF): Racing more than 600% higher year to date, shares of Tesla have electrified investors' portfolios. And in the eyes of one analyst, Mr. Market won't be taking his foot off the pedal anytime soon. Mark Delaney, an analyst at Goldman Sachs, boosted his one year-price target on the stock to $780 from $455. Bears, however, believe the stock is redlining and bound to reverse course. For those eager to gain exposure to the booming EV market -- but averse to taking on too much risk -- the mixed signals can be overwhelming.
Investors interested in a more conservative approach, therefore, would be well-served to consider an exchange traded fund such as the Invesco WilderHill Clean Energy ETF. Representing an ideal opportunity for alternative energy investors, the ETF limits the risk of an individual stock tanking while offering exposure to several niches of the clean energy landscape.
While fuel cell stocks FuelCell Energy and Plug Power represent the ETF's largest and fifth-largest holdings, respectively, there's also plenty of exposure to the EV industry. The Chinese EV manufacturer, NIO, represents the fund's second-largest holding, while Blink Charging, a company dedicated to the global deployment of EV charging infrastructure, is the fund's third-largest holding. And that's not all. The fund includes smaller positions in other popular EV manufacturers: Kandi Technologies, Workhorse Group, and ElectraMeccanica Vehicles. And, yes, picking up shares of the WilderHill Clean Energy ETF will also gain exposure to Tesla, which accounts for 2.25% of the fund's portfolio.
Currently, investors can pick up shares of the ETF at a relative discount; it's trading about 10% lower than its 52-week high. The ETF's expense ratio of 0.70% may give some investors pause; however, the ETF has a 12-month distribution rate of 0.40%, which takes some of the sting out of the expense ratio.
