Valuing Tesla [TSLA] — Or Any Company — In The Coronavirus Era
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In my regular job, I’ve been tracking the progress of the coronavirus very carefully for approximately the past month. It was one of the fastest changing situations that I have ever been in some way part of. I was communicating directly with health officials about the situation. March 10, only two weeks ago as I write this, I was told that they expected that the spread had begun, but that it was containable and would not affect any operations until the end of April, if ever.
On the next day, March 11, I was told that it appeared the date for how quickly it affected things would be moved up to early April. That same day, I spoke with a friend who was organizing an event in our area Sunday, March 15, to see if he had heard anything differently and if it was affecting him. He told me that they assured him everything was safe and good to go, just as they had with me.
By March 13, my friend was told his show was being canceled by the state, schools were shuttered, and the entire world was seemingly turned upside down.
During this time, I hadn’t thought about pulling any money out of my stock portfolio. Upon reflection, it seems silly that on March 11 I should have seen huge red flags and dumped a significant portion of my portfolio. Shutting down huge parts of the economy is never good for the value of companies, and my stock portfolio in total is down about 50% since that date. In fact, I haven’t sold any shares in any companies that I own, and at this point I don’t intend to.
There is a lot of fear, uncertainty, and doubt out there right now — and, honestly, much of it for a really good reason. That reason is that it seems that countries with outbreaks right now are not following any sort of playbook, and instead we have politicians trying to figure out how to respond to an unseen enemy with a complete patchwork of regulations based on who they are talking to. At the same time, politicians everywhere don’t quite know what they will do to overcome the economic hardship the shutdowns will cause.
When I sat down to write this article, I thought about what sort of value I could add to anyone at this time. In this case, I’m wholly unqualified to offer insight into the spread of the virus, or when restrictions should end. I don’t have any idea about when to time the bottom of the market — and, quite frankly, I don’t think that moment is right now.
What I can try to offer is my thoughts on how I value companies I hold, and how that thought has made it so that I remain comfortable with my portfolio in these times. In fact, had I sold my shares back on March 11, I probably would have re-purchased the same companies by this point in time, just more of them all.
Frugal Moogal’s Guide To Valuing Companies
Truth is, this is what I use for figuring out if it’s worth investing in a company at any time, not just during the coronavirus age. I feel compelled to add this isn’t all that I look at, but I think it’s a good starting point. In no particular order:
- Company Leadership — Great company leadership is the first thing that I look at for any company. This can be the CEO position, but it usually goes deeper than that. Is the company’s leadership responsive to customer needs. Do they have background in similar industries? Do they have leadership that their employees both see and feel like they can talk with?
- Executive Pay — For this, I look at something specific, and that is base pay and bonuses. I like to see these numbers to be as small as possible for a simple reason: Oversight. Even if they deserve it, a CEO appearing to grant themselves significant pay or bonuses is never good optically. It makes me question how the company is being run. Stock benefits that are clearly spelled out, take time to vest, and must be held for a period of time are my favorite. They encourage solid long-term growth, whereas Wall Street often seems focused only on 90 days at a time. As you can imagine, Elon Musk’s package with Tesla is perfect to me.
- No Stock Buybacks — As politicians debate if we are going to bail out airlines who bought back billions of dollars worth of shares, I hope that we start to put a bigger value on companies that plan for the long haul. I keep the rule that if a company is buying back its shares, I have no interest in owning it.
- Long-Term Planning — Along with the above, I need to know what the plans are for a company in the future. I have worked for a lot of companies that look at just what a single quarter looks like, and there is far too much emphasis on this in investing. Goosing your profits in every way possible is unmaintainable, and companies end up trying to follow what they are told instead of doing what is best for them.
- Is The Business Future-Proof — I don’t invest in businesses I think might be in an industry that is ripe for disruption, unless I believe I’m investing in the disruptors. Oil might be critical at this moment, but putting aside the environmental damage it causes for a moment, it would be an investment I would never consider because I anticipate that in the next 5–50 years, it will go away as an industry, and I don’t like trying to time things.
- Do I Understand What They Do? — This is really simple, but often overlooked. If you don’t know what a company really does to make money, don’t invest in them. This shouldn’t just be top level though — dig into their financials and figure out what you’re looking at. For Tesla, for instance, I felt like I needed to understand regulatory credits, warranty repair accounting, and solar leasing agreements before I felt confident in the company. If someone asks you, can you explain the way your companies make money in a couple of sentences? If you can’t, then it probably isn’t for you.
- Am I Too Close To Them? — While I believe you should invest in what you know, you should not invest in companies just because you love them. Walt Disney World is your favorite thing? That’s not a reason to invest in Disney. Go to every WWE event in your town (when we’re not in quarantine) and follow all the WWE news? That’s not a reason to invest in WWE. Heck, think your Tesla is the greatest car ever? That’s not a reason to invest in Tesla. It may be a starting point to invest in these companies, but if your decision-making process will be clouded by how much you love the product, you won’t make prudent decisions. That’s bad.
- Invest For The Long Haul — I had originally titled this “don’t try to time the market,” but I think the real lesson is that you should never invest in a company that you don’t intend to hold for at least three years.
While we are in an economic downturn, none of the above has changed for any of the companies that I own. I’ve used this method for my investments for over 10 years, and while my share prices have taken a hit, I have confidence in them recovering over the long term. In fact, right now, I wish I had extra money because I’d love to invest more in the companies that I own.
Hope this helps in these crazy times.
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