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Tesla Can Teach Us the Importance of Diversification

A balanced jobs report on Friday spurred a rally to bring stocks back to about even for the week. Official unemployment dropped to 3.9%, but soft wage gains may encourage the Fed to pursue a slower path of interest rate hikes. Apple, the world’s most valuable public company, rose 13% for the week, driven by strong earnings results and news that Warren Buffet increased his stake. M&A activity remained strong, with T-Mobile agreeing to buy Sprint and Marathon Petroleum buying Andeavor, which will create the nation’s largest oil refiner if approved.

Weekly Returns

S&P 500: 2,663 (-0.2%)
FTSE All-World ex-US (VEU): (-0.5%)
US 10 Year Treasury Yield: 2.95% (-0.00%)
Gold: $1,315 (-0.7%)
EUR/USD: $1.196 (-1.4%)

Major Events

  • Monday – T-Mobile agreed to buy Sprint for $26 billion in a deal that is expected to be closely scrutinized by antitrust enforcers.
  • Monday – Marathon Petroleum agreed to buy Andeavor for $23 billion.
  • Monday – Wal-Mart sold its British unit Asda Group to rival J Sainsbury for $10 billion.
  • Tuesday – Apple overcame fears of soft iPhone sales with strong earnings results and the announcement of a $100 billion share buyback plan.
  • Tuesday – Guitar maker Gibson filed for bankruptcy.
  • Wednesday – The Wall Street Journal reported that over half of the 20+% earnings growth in Q1 was driven by tax law changes.
  • Wednesday – Rudy Giuliani said President Trump reimbursed his personal lawyer for a $130,000 payment made to Stephanie Clifford.
  • Friday – President Trump said a time and date have been set for a meeting with North Korean leader Kim Jong Un.

Our Take

Tesla is one of the most polarizing stocks I can remember. People seem to either love it or hate it. CEO Elon Musk took this to a new level with unusual behavior on the company’s earnings call this week, including deciding not to answer some questions he deemed “boring.” Shares fell 6% the next day despite most financial metrics being better than expected.

It is easy to paint either a very bullish or bearish picture. By pushing electric and autonomous driving cars forward, the company is changing the world in a big way. Tesla cars are fashionable and create passionate emotions for many owners, similar to what Apple did in consumer electronics. Sales growth is explosive. The premium model cars perform as well or better than most super-cars.

On the other hand, the company is losing money and is likely to need to raise more capital. Its shares trade at about four times sales, compared with about 0.4 for GM and 0.3 for Ford. Tesla cars remain expensive compared to alternatives.

I was in New York last week. Compared to California, it was shocking to see how few Teslas were on the road. So, it wouldn’t be surprising if some of the division in outlook is geographical in nature. It is harder to be bearish when you see them multiplying like mushrooms in the Bay Area compared to hardly seeing them at all in other areas. We don’t have a specific forecast for the stock.

We believe in diversified portfolios and feel strongly that this means thoughtful and meaningful allocations to both boring stocks like utilities as well as trendy, high valuation tech-driven companies. For most people, any single stock shouldn’t play too big of a role in portfolios. With any investment, it is important to understand upside and risk (especially for short-sellers) and avoid emotional decision making.

To learn more, contact a financial advisor.

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