This morning's better-than-expected number of initial jobless claims was not enough to lift U.S. stocks today, as the benchmark S&P 500 ended the session with a 0.2% loss. The narrower Dow Jones Industrial Average (^DJI) was essentially flat, down just three hundredths of a percentage point. On Monday evening, I pondered whether the momentum rally had just stalled and, while the jury is still out on that question, there does seem to have been a shift away from high(er)-beta shares this week, including technology and small-capitalization shares, both of which continued to underperform the S&P 500 today.
Furthermore, the technology-heavy Nasdaq Composite Index (^IXIC) and the small-cap Russell 2000 Index have been very tightly correlated since the beginning of the week, particularly during the past two days. One of the high-profile growth stocks that underperformed today is Tesla Motors (NASDAQ: TSLA), which lost 2.6%. While Tesla's stock is already down by more than a fifth from its 52-week high, the price remains significantly above its intrinsic value (more on this below), which suggests that further declines could occur.
A possible catalyst for today's drop was the publication of a research note by Wedbush Securities, lowering its price target for the stock from $295 to $275 on the basis that:
We take a moderately more conservative position on evidence of rising risks for Tesla's Giga Factory with a noncommittal commentary from Panasonic and supply chain indications that materials asking prices are rising. [Note: the gigafactory -- Tesla Motors' own term -- refers to a planned battery manufacturing facility.]
Nevertheless, whether $295 or $275, these are breathtaking numbers as another, more interesting piece of research published this week demonstrates. I have referenced in the past the blog of Aswath Damodaran, who is a professor of finance at New York University and the guru on stock valuation. On Tuesday, he published his revised valuation of Tesla Motors. The good news for Tesla bulls is that his new estimate of Tesla's per-share value has risen by two-thirds compared to when he performed the same exercise in September. The bad news is that, at $112.50, it is barely more than half the current share price.
If you own shares of Tesla Motors or are considering owning them, I cannot urge you strongly enough to read Professor Damodaran's blog post in its entirety (as well as the discussion in the comments section, in which he participates.) Not only does Professor Damodaran present and discuss his assumptions, but he also provides links to his valuation spreadsheets so that investors can perform their own analyses.
Finally, the post contains some broader thoughts on the nature of investing that are filled with wisdom. Prof. Damodaran is a value investor, at least insofar as "investment philosophy is built on the foundation that you should buy an asset only if trades at a price less than your estimated value for that asset." As such, he "cannot justify buying Tesla at the current price;" however, he allows that people may follow other approaches:
Your philosophy on investing may be different from mine, and probably better (or at least more lucrative). If you are a Tesla stockholder, though, I hope that you are one for the right reasons. That would include being a trader (whose focus is price, not value), buying into the disruption model or investing on the expectation of an acquisition, but it would not include investing because others have been making money on the stock, equity research analysts are bullish or just because you love the company, its products or its CEO.
In other words, the only rational, purely fundamental reason for buying the stock is believing in the disruption model (read the post to understand what this means.) There is nothing wrong with that per se, but it looks like a very long odds bet to me.