I took a good, hard look at my personal portfolio last week. A couple of my smaller positions ended up in the "sell" pile. I also reduced by holdings in Tesla (TSLA 12.06%) by 25%.
I have no intention of cashing in my entire Tesla position anytime soon. This is a deeply misunderstood business with much larger ambitions than its current focus on electric vehicles, and I expect the stock to deliver multibagger returns over the next several decades. That's why I'm holding on to three-quarters of my Tesla shares.
Now let me tell you why those Tesla stubs got a 25% haircut, anyhow.
Let's grab a few bills off the top. Image source: Getty Images.
1. I could use some investable cash
Let's not beat around the bush: There's another big market correction in the air, and I want to be ready to buy when stocks are cheap again.
The stock market had no business trending upward in 2020, as if the COVID-19 pandemic wouldn't matter at all. But that's exactly what happened. The S&P 500 market tracker rose 16.3% last year and the Dow Jones Industrial Average gained 7.3%. Silicon Valley's Nasdaq Composite Index went completely bananas with a massive return of 43.6%:
At the same time, corporate earnings generally crashed and burned. Rising prices plus weaker profits equals skyrocketing price-to-earnings ratios. That's just one example among many financial metrics telling the same basic story.
S&P 500 Earnings data by YCharts.
So I need some cash on hand, just in case the market suddenly comes to its senses again, and my investment account was running dangerously low on greenbacks. The next earnings season kicks off next week, wrapped around the inauguration of a Democrat president who has promised to roll back many of the corporation-friendly policies from the Trump era. I can't guarantee that these events will trigger the next big market crash, but it sounds like a good idea to be ready.
2. Tesla's stock is overheated
Tesla has been reporting some good news recently. Vehicle deliveries approached 500,000 units in 2020 and CEO Elon Musk said that this figure could double in 2021. Trailing earnings recently rose above the breakeven point. Fourth-quarter sales are expected to rise 38% year over year when Tesla drops that report in two weeks, and the company has a history of exceeding Wall Street's revenue targets.
That's all good, but not nearly enough to support Tesla's lofty valuation.
Mr. Market currently argues that Tesla is worth $800 billion. Remember the big gains that the S&P 500 and Nasdaq Composite Index posted last year, and how I think they're setting us up for a dramatic market correction this year? They were actually flatlining in comparison to Tesla's enormous returns.
The Tesla shares I sold last week for $778 per share were added to my portfolio in October 2019 at $45.80 per share, adjusted for the 5-for-1 stock split of August 2020. That's a return of $1,600%.
I don't even feel guilty for taking some profit off the table at these prices because it will let me redeploy that capital into equally exciting long-term investments with more reasonable stock prices. And if Tesla's stock comes crashing down, I might be able to buy back all the shares I sold at a much lower price. So many options. This cash infusion will absolutely come in handy.
These are unusual times
Let me be clear: The best holding period is forever, especially for high-quality companies that are well-equipped to thrive for many decades to come. Tesla is a fantastic business in my view, aiming to disrupt and dominate the global energy industry in the long game. The electric cars are just the warm-up act for a much larger endgame.
That doesn't mean that I can't rebalance my portfolio from time to time, skimming some of the recent hyper-growth returns off the top in order to explore other investment ideas. That's what I did here, looking forward to volatility and falling stock prices in the year ahead.
It's time to buy when there's blood in the streets... as the old adage goes. Thanks to Tesla, I'm prepared to do exactly that.
