The Trend

Case Study 101: A Lesson in Why Fundamental Analysis is Essential



It’s just as important as technical and news analysis.

It helps us understand the very nuts and bolts of a company to arrive at fair value.  With it, we have a better understanding of competitive advantage, earnings strength, revenue growth, and quality of company management.

With it, we can understand which stock is truly the better buy.


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Look at Tesla (TSLA) and Ford (F) for example.  Which is better?  Tesla, which ran up more than 1,000% since 2013, or Ford, which is up 29% in the same period?

Even after that run, most of us would still choose Tesla.

With a market cap of $50.26 billion, Tesla is insanely valued and doesn’t even pay a dividend.  Granted, there are plenty of reasons to like the company.  It’s offering the world an opportunity to simply charge their cars at the pump, as compared to spending our life savings at the pump.

Every year, it costs more than $2,500 to fill your average car.

Anyway, as much as you may like the Tesla Company, you’d want to question the valuation of the stock and its valuation.  To start, it’s always difficult to fairly gauge fair value of car companies, especially when they’re in different phases of growth.

Tesla is just getting its act together, if you will.  Ford has been around for years.  But what we want to understand in our observation of valuation are its key metrics.  From what we saw in April 2017, Tesla was ridiculously overvalued just on fundamentals. 

Tesla carries a price to sales ratio of 7.18 and a price to book ratio of about 10.5.  Meanwhile, Ford has a P/S ratio of 0.30 with a P/B of 1.56.  Even Tesla’s $50.26 billion market cap crushes Ford’s $45.67 billion market cap, which alone is ridiculous.  It’s actually closer to General Motor’s current market cap of $51.5 billion.

Then again, it’s hard to argue against a gain of 1,018% in about four years, as compared to Ford’s gain of 29% over the same time.  But at current prices and valuations, Tesla is clearly overvalued, based on nothing more than hopes for future earnings. 

Tesla is currently being valued on the idea that it can big lots of its cars years down the road.  But with car sales of only 80,000 in 2016, it’s unfairly overvalued.

Instead of valuing such a stock for what it may be able to do 10 years from now, it’s best to value it for what it can do right this second.   Granted, no one can argue that upside hasn’t been a great run, but it’s overvalued, as compared to Ford.  So, perhaps Ford really is the better opportunity.

By being aware of not only what’s happening in the news cycle and with technical analysis, but also with what’s under the hood of the car, you have a better view of what’s really happening.