In 1988, Francis Ford Coppola released Tucker: The Man and His Dream, a film about a visionary car maker whose attempt to transform the auto industry was brought down by the Big Three. The real story was far more complex–involving allegations of fraud, an SEC investigation and even whether Tucker ever intended to really build cars–but the image of Jeff Bridges standing in front of the Tucker 48 has stuck in my head.
Getty Images Fast forward and you have another visionary automaker and his Tesla (TSLA). Musk is no Tucker. There’s little doubt that he’s created a marvelous machine, even if the news about its safety rating has been, shall we say, overhyped (the L.A. Times reported that the government doesn’t test most luxury cars). The argument over its quality as an investment rages on.
Into the debate steps Citron Research, an online stock research website. And in a report today, it moves away from the numbers to offer what it calls some “simple common sense.” Citron asks:
Are you smarter than Carl Icahn? While the NASDAQ has been parabolic over the past 18 months, Apple (AAPL) has not been able to get out of its own way. Why is that? Apple has been committing the ultimate sin: it makes money with forecastable cash flow. Who would want to buy a company with a halo brand and a credible international footprint, when I can buy a story about the future, whose only attachment to reality might be an analyst report that has backfilled numbers to justify a stock price?
Hopefully Mr. Icahn's investment in Apple will serve as a beacon of a new market that stock should be bought on cash flow, value, and a reasonable optimism about the future. While every speculative investor has had the opportunity over the past three months to buy Apple, it has now become completely overshadowed by the "story du jour" … Tesla.
Citron also notes that Tesla has sold 15,000 cars since it was founded, while General Motors (GM), in which Warren Buffett just increased his stake, sells 15,000 cars every two days. “Is it going to be easier for Telsa to close this gap or General Motors to adapt to a changing environment?” Citron asks. “Mr. Buffett has placed his bet.”
The report goes on in this vein for a while, and what Citron really seems to be saying is that people love lottery tickets–hi risk stocks that promise to make you rich beyond your wildest dreams, and appear even more valuable after they’ve had big moves. Here’s how Societe Generale’s Andrew Lapthorne, Georgios Oikonomou and Dylan Grice–who has since departed the French investment bank–explained the lottery-ticket syndrome in a report from May 2012:
…people like excitement. They pay good money for it. And in their excitement they pay too much….we think it's down to what psychologists call the ‚possibility effect‛ in which people value potential changes differently. For example, suppose a family member is ill. How much would you pay for medication which improved their chances of survival by 1%? If the prior chances of survival are 50%, that additional 1% chance is valuable. But if the prior chances of survival are 0%, that 1% increase is much more valuable. It changes the range of possibilities completely. So although both 1% improvements are identical at the margin, people tend to the give more importance to the latter because it increases the possible outcomes. It's one reason why people play the lottery so enthusiastically, regularly paying dollars for pieces of paper worth only cents. With a winning lottery ticket comes the hitherto impossible possibility of a new life.
Tesla is great story, and I’m pulling for the company. But there’s also little doubt that as a stock, it’s a lottery ticket. Tesla could be a raging success. Or it could the Tucker 48, a footnote in automotive history.
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