I Did The Unthinkable

I bought shares in Tesla stock. It doesn't pay any dividend, nor does it has cash to pay dividends. It also doesn't have any decent fundamentals, such as earnings or even a good credit rating. You may be asking, have I gone nuts?

I can assure you, I'm fully aware of what I'm doing, even though it may seem like out of a character for a dividend growth investor to even look at a stock like TSLA, let alone buying it.

So what happened? How did I end up buying Tesla's stock?

Tesla's stock chart showing negative earnings are expected till 2019

I've been a dividend growth investor for a long time, and it has allowed me to retire early from my 9-5 job. I'm very loyal to my dividend investing strategy and buying a non-dividend stock was completely unthinkable to me up till last Friday, when I decided to buy shares in Tesla.

In some ways it's funny, because I was originally thinking with a classic value investor mindset and was about to pick up some shares in General Electric's stock. GE pays a ~2.6% dividend yield after the recent dividend cut, and the stock is trading at lows it hasn't seen over the past six years.

GE would have been a very risky stock for me, but nevertheless it would have fit in as a dividend stock in my portfolio.

Before, I talk about TSLA purchase, let's take a look at GE story, because it is what led me to TSLA.

The GE Story

If you have been watching business news, you probably know that GE is in lot of trouble as a company. I'm not going to go into the troubles of GE here, as it is all over the press, but I would say this much - GE should be an example to anyone who doesn't think that leadership matters.

The mismanagement of the company over the past decade or so has led it to the current state of despair where its future is uncertain. Here is a very good write-up on GE's troubles by a senior fellow at Harvard Business School.

How could this happen to a company as big and iconic as GE?

A bad management is like a rust that eats a company from inside till all is left is a shell of its prior self. GE has been rusting from inside all these years, thanks to the bad management and poor investment choices of its executives. We are now simply seeing the cumulative effect of all those poor decisions.

What about the new CEO?

The new CEO is unproven till he shows solid progress. I've read in the press that he is a numbers/financial guy and not a visionary and lacks the strategy to lead the company forward.

His top priority is to get GE financially healthy by spinning off segments of its business that are not profitable.

Sounds like a good plan, however, for a company the size of GE, such a plan could takes years to execute. In CEO's own words, it could take 5-6 six years to turn the company around.

Also, what would be the end result? Would GE become a holding company for its aerospace, power, and healthcare business? If so, it may not be a great growth story.

The current price of GE stock is simply showing this skepticism and lack of confidence in the current management and there so called recovery plan.

He may be able to pull the company out of dire state its in and move the stock higher, but it's all a big speculation. We don't know how long it's going to take, whether dividend would be maintained or further slashed or what the company would look like when the dust settles.

Just too many unknowns and not enough leadership to count on.

Valuation

From the stock valuation perspective, GE looks cheap and it seems all the bad news is already built into the stock price. However, the FastGraphs shows a different story.

The GE stock is currently trading around $17-$18/share with a trailing P/E of about 16.

Looking at the forward earnings estimate of next year, a good price for entry would be around $15/share, which would be right around a forward P/E of 15 with a respectable yield of 3.2%.

Therefore, based on next year's earnings estimate, the stock is still overvalued. Given a higher uncertainty to the next year's earnings, I would need an additional discount in price before buying GE stock.


Dividend

A company that cuts a dividend once, will almost certainly would do it again, if and when needed. They are not encumbered by the pristine dividend history. It's even possible for the dividend to completely go away in such companies. I've seen this happen, time and time again. Mattel is the most recent example.

Therefore, I can't buy GE on the basis of dividend alone. So what else is there to buy it for?

Growth

If you look at GE's future, there is not much to say at the moment. We still don't know what the new CEO will do in terms of future capital allocation. Where would the growth come from? What new products will drive the new growth areas? The company is just starting to restructure itself, will have to wait and see which way the cards fall before getting a better picture on future growth.

Just as I was about to give up on GE and move on, I heard a voice in my head: What if I buy GE in my IRA retirement account?

A retirement account is a very long-term (15-20 years) investment for me that is on auto-pilot. It is mainly invested in low cost Index Funds and AAPL stock. All the dividends get re-invested automatically, so I don't have to do much in terms of fund allocation. I also have a little bit of cash left over in my IRA account that can be used to buy GE.

I could buy a small position in GE in my retirement IRA account, and then treat it like a passive investment and forget about it for the next 15-20 years. Hopefully, in that time frame, the company would surely do well and get out of its current problems and I would make a hefty profit.

Sounds like a good strategy, but there is only one problem.. The missing leadership.

GE has a new CEO, we don't know if he is the leader enough to take the company into growth path in addition to getting out of its current problems. I just don't know enough about him to put my very long-term confidence in his hands.

If I were to invest in GE now, it would have to be for the price growth only, as the dividend is not safe and could see additional cuts or even elimination.

I can't buy a non-dividend paying company in my taxable dividend growth account as it would not provide a dependable and growing dividend income. So, the only option left is to buy it in my IRA account.

But the problem is I cannot buy GE in my retirement account either, as I don't see the passion and vision coming from its leadership to drive the long-term growth.

In the absence of everything else, it is after all the leadership that matters the most, and that leadership is missing from GE.

If I were to take a big risk and wait 15-20 years for a huge profit, why not take the risk with a company that has a visionary and passionate leader?

The Tesla Story

I was watching news and saw Elon Musk talk about Tesla's new roadster and electric semi-truck. I was like wow, this guy is so passionate about whatever he does. It doesn't matter what obstacles come in his way, he plows through it, and keeps coming up with new products and ideas that are pushing the limits on anything we have seen before.

This guy reminds me of Steve Jobs or even Bill Gates. Both of them passionate about what they did, they built a company from nothing into something great and changed our lives forever.

Jeff Bezos is another example of an innovative and passionate leader. He took an online bookstore and turned it into a most fearful and innovative global giant. Amazon was losing money for most of its history and it hasn't been recently that it started to make profit.

However, if you had bought shares in Amazon 20 years ago, you would have made over 22792% in pure growth on your stock investment. Similar results are true for anyone who bought Apple or Microsoft shares back in the nineties.

A $10,000 investment in 1998 in Amazon would have become $2,289,247 in today's money. That's over 2 million dollars of net capital gains.


I'm not saying TSLA will be the next AMZN, but even if it ends up only half as good as AMZN, it would still be a great investment for the future.

All these guys (Gates, Jobs, Bezos, and Musk) have one thing in common, they are super passionate about what they do, they are tireless, and nothing stops them.

I think, Elon Musk is the Steve Jobs and Bill Gates of today. He can also be compared to Jeff Bezos in his early years of Amazon, before it started to take over the world.

Elon's company Tesla has products that are loved by a lot of people who wouldn't mind shelling out huge amounts of money to get the experience of driving in one of his most futuristic cars or whatever he dreams up next.

The Final Decision

I decided, if I were to take a big risk in investing in GE stock, which has no dividend safety and no clear path to future growth, and no visionary or passionate leadership at the helm, then why not take a chance with a futuristic company like Tesla that has one of the most passionate and innovative leaders of our times with products that people love and admire.

I don't want to regret 10 or 15 years from now that I missed out on TSLA, just like I regretted about AAPL and AMZN. So, I went ahead and bought a small position in TSLA in my IRA account.

The position is small enough that it won't pose any material risk to my long-term retirement portfolio, but it is big enough to make a significant contribution to my overall retirement position, if the company were to have an explosive growth similar to what we have seen with the likes of MSFT, AAPL, FB, and AMZN.

At the end, it's all about the leadership that makes or breaks a company.

Disclosure: I am very long TSLA. I also own AAPL and MSFT.

Disclaimer: Author of this article is not a licensed/registered financial or investment adviser and does not provide investment advice. Any mention of stock names/tickers in this article or website is not a recommendation to buy or sell. Please do your own due diligence before buying any stocks. This article is for informational and entertainment purposes only. Full disclaimer can be read here: Full Disclaimer

Comments

  1. There is a lot here Mr. ATM. Where do I start? Well. First, I forgive you :). When we first met through our blogs, you said you were like me and didn't invest in any company that doesn't pay a dividend.

    Okay, now I see you think things through and are not afraid to adjust your strategy when your analysis and gut say to do so. That is a good thing. I can not blame you for that a bit. And, as I have read your thought process and context of the trade, I must say I can't argue with your logic at all. You know by now, I'm a bit sour on GE, so I can't argue with turning a cold shoulder that way either.

    I'm not much of a visionary, so I hope Mr. Musk changes the world as we know it. Just like Gates and Jobs did. We need people and companies like that to power the world economy and create the next big thing. You should be proud to provide them with your hard earned capital.

    Even though as a dividend growth investor, I feel a little jilted, I hope you make a small fortune and expect to enjoy a celebration beer with you when you do! :) Tom

    ReplyDelete
    Replies
    1. I understand your reaction, and also appreciate your understanding Tom.

      TSLA is my first non-dividend stock, as far back as I can remember buying a stock. I think of it as a bit of vacation I took, away from my dividend stock portfolio.

      I could've only afforded to do this, if I hadn't felt comfortable with my dividend portfolio and saw no risk to my current dividend income or future retirement assets.

      After this post, I will not be talking about TSLA for a long time as it will be living in the walled gardens of my IRA among AAPL and index funds.

      So, no need to feel jilted about it, we are still mostly the same when it comes to our investment principles around dividend growth investment strategy.

      Will be looking forward to that beer sometime in the far future :)

      Delete
  2. Hello Mr ATM! I always enjoy your detailed reports, charts, and graphics! You are a visionary yourself :)

    I agree with you on GE. I believe it was Mr. Wonderful that said GE is where money goes to die.

    Musk is indeed quite a character with big ambitions and dreams. I'm concerned about how much money they are losing with their vehicles right now and their production issues. These things can turn around though. Truth be told, I owned a small amount of Tesla shares a couple of years ago that I sold for a quick profit. Not a huge amount.

    They do kind of have a stigma around the vehicles right now...Almost like the iphones in a way. Not quite the cult following yet.

    I hope it does well for you though as I always wish my friends the best.

    ReplyDelete
    Replies
    1. Thank you DS for the kind words :)

      I don't know if I'm a visionary, though I've learned to listen to my gut as much as I look at the data and also pay attention to what may be coming in the future.

      This is what former Intel CEO Paul Otellini said about his mistake of saying no to Apple, when Steve Jobs came to Intel asking them to build chips for the original iPhone: “The lesson I took away from that was, while we like to speak with data around here, so many times in my career I’ve ended up making decisions with my gut, and I should have followed my gut. My gut told me to say yes.”

      https://www.extremetech.com/computing/156126-intel-couldve-powered-the-original-iphone-but-decided-against-it-says-ex-ceo-otellini

      Sometimes, you have to listen to your gut. I listened to my gut when deciding to invest in TSLA, despite all the data showing Tesla a very risky stock.

      Delete
    2. You make a very good point there about Steve Jobs. I also used the wrong word when I said "stigma" about Tesla's. Much the opposite, there is a good vibe about the vehicles. People are excited to own them, just like people waiting in line for iPhones. Let's see if they can mass produce and make $$$$.

      Delete
  3. Congrats on your purchase of Tesla shares, Mr. ATM! I feel the same way as you about the importance of leadership. I definitely see Elon as the current Steve Jobs. And what incredible growth Amazon has provided to shareholders. I want to pick up shares of Tesla but my portfolio is too small to go against the strategy at this point. I’ll probably regret that choice someday. Elon Musk definitely has it. His products are beautifully designed and he is super passionate about the company. And he’s got skin in the game. Thanks for sharing!

    ReplyDelete
    Replies
    1. Hi RTC,

      Do what makes you feel comfortable.

      I would say for DGI'ers, invest in TSLA like stocks only after you have met your DGI goals and feel comfortable adventuring out.

      I also keep TSLA shares in my retirement IRA account, which is a passive very long-term account for me and thus, I don't track it on a regular basis.

      TSLA is a buy and forget stock for me with expectation that it would yield very high returns for me in the very long-term when I'm of retirement age. Of course, I could be completely wrong, in which case my loss would be limited and immaterial to my overall retirement portfolio. So, manage your risks wisely when investing in high risk stocks.

      Thanks for your comment and stopping by.

      Delete

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