Julian Koski, Co-Founder and Chief Investment Officer, New Age Alpha Mar 15, 2021 1:05:13 PM 10 min read Stock Insights

Tesla: Can it Continue to Soar?

Go ahead and guess what the following describes:
  • A devoted following so intense that fans created a dating site dedicated to their shared love affair
  • A leader who has actively poured cold water on its undertakings on many occasions
  • Venomous hate spewed from those who can’t wait to see it all go down in flames
Is this a famous politician? Maybe a sports star? Or, perhaps, a K-Pop band? Nope. Merely a tech genius, Elon Musk, and his company, Tesla (NYSE: TSLA), whose stock has likely inspired the most sharply divided set of opinions of any security in recent memory.

Back in January 2020, we wrote about Tesla’s comparative attractiveness, amid much tumult surrounding the company. Throughout 2019, industry heavyweights such as David Einhorn and Jim Chanos were on record with their barbs, with Einhorn predicting the company would go bankrupt. And through 2020, even as short-selling investors lost more than $39 billion, TSLA remained one of the most shorted stocks in the market.

The prospect of a fast-growing company like Tesla filing for bankruptcy or even seeing a significant drop in its stock price was anything but definite. In fact, it was quite speculative. But this is the type of vague and ambiguous information many investors were hearing and impounding into the stock price. In hindsight, we now know that the company neither went bankrupt nor did it ever see a sustained drop in stock price. Instead, the stock price continued to climb overall, despite assorted bumps in the road over the course of the year. This was reflected in the company’s average Human Factor score of 36% through 2020, after starting at 19% and ending at 47%.

You see, the Human Factor is the probability a company will fail to deliver the growth implied by the stock price. It measures the risk that comes from humans interpreting vague and ambiguous information in a systematically incorrect way. By stripping out this information, the Human Factor allows us to focus on what we do know for certain about a stock.

Below is a 2020 analysis comparing the Human Factor of TSLA to its stock price.

Human Factor vs. TSLA Price


Human-Factor-vs.-TSLA-Price

At the time of our Case Study in January 2020, Tesla’s Human Factor was relatively low at approximately 19%. Since then, the stock’s price—with a few hiccups along the way—ramped higher overall. Because the Human Factor measures the probability that the company will not deliver the growth implied by the stock price, the Human Factor also generally rose in tandem. At such comparatively high prices today, an investor pondering a position in TSLA may be correct to ask, “what’s next?” Afterall, with the stock price so much higher, it stands to reason that the probability that it won’t justify that price might also be higher. Is it still worth purchasing?

Well, in our opinion, this is where the beauty of the Human Factor truly shows itself. We believe a common misperception among investors trying to pick stock market winners is that such decisions need to be binary—that one must put all the chips on either black or red, ‘buy’ or ‘sell’. We believe a new viewpoint is required. In our eyes, the more appropriate question should be: where does Tesla fit in my portfolio? Put in this light, the H-Factor System allows an investor to, instead, use probabilities to measure risk appropriately based on known information.

Human-Factor-Tool-1

New Age Alpha’s H-Factor System reveals that now, as of February 10, 2021, TSLA’s Human Factor of 55.7% is higher than all of 2020. On a strictly numeric basis, this score is slightly worse than a 50% average, obviously. Where it gets interesting, however, is when one views this score on a relative basis.

For example, compared to its peers in the Consumer Discretionary sector overall, the result is practically a push. With a median score of 53.0%, the sector is very similar to TSLA itself. Given Tesla’s ventures in aerospace, information technology, etc., one might view Tesla as a member of the larger sector overall and, based on these Human Factor scores, choose to equal-weight the stock with other Consumer Discretionary options.

However, if one sees Tesla as strictly an automobile-focused company, the results change dramatically.

Human-Factor-Tool-2

Relative to peers such as Ford or General Motors, with respective Human Factor scores of 72.3% and 64.0%, Tesla may be a better option for one’s allocation in the automobile space. However, compared to others such as Toyota and Hyundai, with respective scores of 19.7% and 22.0%, such an allocation may suggest further contemplation. The main point of these comparisons is to remind that investment isn’t a simple matter of buy or sell but, rather, a matter of proper portfolio weighting. The H-Factor System offers an unbiased tool that focuses strictly on the facts and the probability a company will fail to deliver the growth implied by its stock price.

Einhorn and Chanos may’ve call for Tesla’s downfall but, relative to its auto-making peers, that’s like saying Durant-Dort Carriage Company was a terrible investment at the turn of the century. The largest horse-and-buggy manufacturer at that time had its problems—but so did the entire industry. And though Durant-Dort folded in 1924, founder Billy Durant went on to co-found General Motors and Chevrolet. As mentioned, a new viewpoint is required.

Human-Factor-Tool-3

But what about Tesla as a standalone investment? It’s difficult to address Tesla accurately without acknowledging Tesla’s unique nature. Many would find comparing Tesla to the overall Consumer Discretionary sector as unwieldy given its size, while others might find comparisons to traditional auto manufacturers as too confining. After all, Tesla can be labeled a car company, a solar company, a lithium battery company, a technology company, or a vision company. Viewed in such a way, we can dig deeper by using the H-Factor System to get a personalized look at TSLA’s positioning based on one’s views.

For example, a surprising result is found when comparing TSLA to the Energy Equipment & Services Industry in the U.S. The Industry’s median H-Factor Score of 45.6% is approximately 10% less than Tesla’s score. This suggests that if one views TSLA as possessing added solar and lithium battery opportunities, there may be options in that space more likely to support the growth implied by the stock price. By expanding one’s options, an investor could conceivably find a combination of automobile and energy stocks that compare to Tesla’s unique nature but with less risk that those stocks fail to support the growth implied by TSLA’s stock price.

We believe TSLA’s Human Factor indicates it can be a part of a balanced portfolio relative to its Consumer Discretionary, Automobile, and Energy Equipment & Services peers when weighted appropriately. This is one of the benefits of the H-Factor System. Remember, investors think in terms of picking winners, when their goal should be to avoid the losers. The H-Factor System is designed to methodically identify, measure and avoid stocks that erode a portfolio’s returns.

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Co-authored by Matthew Waterman and Andy Kern

About Us

New Age Alpha is a global leader in building actuarial based asset management solutions that aim to inure investor portfolios against an idiosyncratic risk caused by human behavior. Investors are unaware of this risk that leads to loss, cannot be diversified away, and don’t get rewarded for taking it. Unlike firm specific risk, that can often be diversified away, this risk affects stock prices specifically and we believe is caused by human behavior. Through our research we have identified a dramatically differentiated source of alpha that is uncorrelated with traditional risk factors and managers, and as the foundation to our investment approach, we have built a range of actuarial based asset management solutions that aim to mitigate and inure investors’ portfolios against this risk.


Disclosures

Past performance is not indicative of future results. Current and future results may be lower or higher than those shown. It is not possible to invest in an index. An investor utilizing the Human Factor may experience a loss. No client or prospective client should assume that any information presented in this data set serves as the receipt of, or a substitute for, personalized individual advice from New Age Alpha or any other investment professional. All research and data are simulated and should not be considered indicative of the skill of New Age Alpha. The research data presented in this document has been calculated backwards in time and is not a contemporaneous record of actual assets managed by New Age Alpha.

The accuracy of the Human Factor is materially reliant on the integrity of the information utilized in the calculations, including any assumptions and or interpretations made by the user about the data. Data discrepancies, and user assumptions, can all contribute to differing outcomes. The underlying assumptions and processes presented herein are subject to change. New Age Alpha reserves the right, in its sole discretion, without any obligation and without any notice, to modify the information contained in this material, or to correct any errors or omissions in any portion of this material at any time.

The above statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. The views stated herein are only current through the date stated and are subject to change at any time based on market or other conditions and New Age Alpha disclaims any responsibility to update such views. Any Human Factor information or charts presented herein or utilized in the Human Factor system are provided for illustrative purposes only and should not be construed as providing investment advice or as a recommendation to buy or sell any particular security. The Human Factor information provided herein is a snapshot taken at a particular point in time and any analysis or information contained in this document is outdated and should not be relied upon as investment advice. Moreover, the information presented in this document may have changed materially from the date on which it was created. New Age Alpha may or may not currently own the securities at the times set forth in this article. There is no intention for New Age Alpha to include these securities in its portfolios unless it becomes part of the established universe of eligible securities that are part of each specific investment strategy (e.g. the S&P 500®). It is important to note that there can be no guarantee that the application of the Human Factor to investment portfolios or certain stocks or securities can produce profitable results.

All New Age Alpha trademarks are owned by New Age Alpha LLC. All other company or product names mentioned herein, including S&P® and Dow Jones® are the property of their respective owners and should not be deemed to be an endorsement of any New Age Alpha product, portfolio or strategy. S&P Dow Jones S&P® is a registered trademark of Standard & Poor's Financial Services LLC ("SPFS”) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones").

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