I don’t often disagree with Warren Buffet, but his position on companies providing guidance was one example.  In a previous post, I argued that the more information companies give investors, the more accurately they will price stocks, on average.  Perhaps there will be instances where investors might over- or under-react to certain information releases, particularly if it is vaguer information like guidance.  But that possibility should not make executives the paternalistic managers of investor sentiment.             The problem is a good deal worse if companies decide to withhold ..read more

            Academics and practitioners alike recognize that increase in the perceived risk of equity investing, and the associated increase in the risk premium, can cause stock prices to fall.  Most of the measures of risk are abstract like the historical standard deviation of stock returns or the future implied volatility of returns as measured by the VIX.  There is one more basic measure that I believe has a more visceral impact, the frequency of large drops, defined as 1% or more, in widely reported stock indexes.  When sharp price drops occur not only do investors lose money, but the d ..read more

            With all the turmoil in the markets, I felt it was time to take a look back at the ten bubble stocks from my post after the close on October 3.  The table below shows the performance between the close on October 3 and the close today (October 29).  The table shows that the average return for all ten has hit bear market territory – down more than 20%.  If Tesla, the one exception to the rule is eliminated, the average for the other nine is down an astonishing 25.5%.  Turning to the individual stocks, there (AMD, Roku and Square) are down more than 30%.  Amazon has shed more than $2 ..read more

            On October 24, 2018 Tesla announced its best quarter ever.  Sales rose to $6.8 billion from $4 billion the previous quarter.  Gross margin improved to 22.33% from 15.46% in the second quarter of 2018 and 15.05% in the third quarter of 2017.  Most importantly, earnings per share turned positive and reached a record level of $1.75 per share.             With Tesla’s new-found profitability, for the first time it is possible to compute meaningful P/E ratios and to make comparisons with other auto manufacturers.  To do so I assume that Tesla earns the same $1.75 per share for the nex ..read more

            With stock prices down sharply last week the words “bear market” and “correction” have once again been bandied about.  In response, I first offer the standard definition of both terms and then a warning.  A “correction” is defined as a drop of 10% or more in major indexes like the S&P 500 from previous highs.  It is called a “bear market” if the drop is more than 20%.             As properly defined, both corrections and bear markets are ex post concepts – they say nothing about the future.  Too frequently both terms get misinterpreted.  People say we are “in a bear market” a ..read more

       Service hell.  Though it might be more hell for owners than for Tesla.  Tesla reported a 3rd quarter profit ather the market closed today and the stock has sky-rocketed again.  The company showed that it can produce the Model 3 in meaningful volume at margins of 20% (as long as the cars are sold for a minimu of $46,000).  The problem is that as all these added cars roll out, they will all have to be serviced.  In fact, the new Model 3s may need more service than the S or X given the race to produce them.  As the owner of an S (in fact I have owned three of them), I am dreading service h ..read more

            In numerous posts on this blog, I have argued that the stock of Tesla has been overvalued.  That remains true, though less so in my opinion, today.  I say less so because one thing I did not evaluate accurately when I began constructing valuation models for Tesla in early 2014 was how slow the competition would be to produce electric cars that people would want to drive.  Tesla competitors, to the extent that any appeared, seemed to be saying that the point of an electric car was to be green and efficient, not sexy or exciting.  When I see a Chevy Bolt, or a BWM i3, or a Nissan Le ..read more

            Critics of this blog point out that almost all the valuations we have posted here reach the same conclusion – the securities in question are overpriced.  The most recent example is the ten bubble stocks.  At Cornell Capital, we agree with the critics.  Most every stock we evaluate, particularly the tech stocks, are either properly or overvalued in our opinion.  But there are exceptions.  As one example, consider GM.             GM has streamlined operations, reduced the number of brands, improved the quality and design of its cars, cut pension expense, and become a leader in self ..read more

             A worrisome fact is how little many Americans know about stock market returns and historical performance.  That ignorance limits the extent to which they participate in the long-run benefits that stock ownership conveys and by so doing exacerbates the inequality of wealth.  An article from the current (October 18, 2018) issue of Fortune magazine, excerpted below, illustrates the problem.    The article reports that 48% of respondents to a survey think that the stock market has not gone up in the decade following the bankruptcy of Lehman.  In fact, the article reports, stocks are u ..read more

            Someone once said if you make a forecast and it turns out to be right, don’t let anyone forget it.  In the last couple of weeks Cornell Capital Group issued two warnings.  In Beware the Bonds of October, posted on September 22 we warned that bonds appeared even more overpriced than stocks and that a rise in yields could have a sharply negative impact on stock prices.  Next, in Bubble stocks: What goes up might come way down posted at the start of trading on October 3, we identified ten companies that we felt were significantly overvalued and could drop substantially.  Well we did ..read more