Can A Company Be Great And A Great Short? – John Rubino

October 13, 2017

One of the fascinating things about financial bubbles is how they
transform great companies into screaming short sale candidates. Put
another way, bear markets tend to throw even the prettiest babies out
with the bathwater.

Here, for instance, is what happened to Cisco Systems, the dominant
maker of networking gear (the devices that run the Internet) when the
1990s tech stock bubble burst, bankrupting many of its customers and
causing its earnings to miss expectations. Its stock fell by more than
three-fourths and those who had bought it during the previous year’s
euphoria got hosed.

Cisco recovered, as great companies do, and continues to lead its part of the tech world. Current market cap: $160 billion.

And here’s Bank of America, which was a rock-solid dividend paying
machine during the 2000s housing bubble – until the bubble burst and
everyone defaulted on their mortgages. B of A stock fell by 90% and it
stopped paying dividends, leaving its (mostly retiree) shareholders with
massive capital losses and zero current income.

It too subsequently recovered and, along with Goldman, Morgan and its
other money center bank peers, is now back to manipulating markets with
impunity and paying rich dividends. Its market value is a little north
of $270 billion.

Which brings us to the current bubble, bigger and broader than its
predecessors and so – presumably – full of more great companies about to
morph into life-changing shorts. Consider Tesla:

You have to love this company. Founded and run by Elon Musk, who inspired the Tony Stark character in
Iron Man, it’s a leading maker of electric cars (which are both
insanely fun to drive and the solution to the oil part of the fossil
fuels dilemma) and solar panels (solution to the coal part of fossil
fuels). So it’s about as cool as a company can be.

But after rising by more than 1000% in the past five years it now
trades at nearly 6x sales – an extremely rich multiple for an
established company – and is having some dramatic production problems
with its newest models:

Tesla: Model 3 production problems prompt electric Semi delay

(Green Car Reports) – Tesla’s aggressive goals for Model 3 production
have run into a series of setbacks, and the knock-on effect spilling
over into the company’s planned electric semi truck debut, which has
again been pushed back from its overdue September launch.
Elon Musk announced the later, November 16 unveil date for Tesla Semi
via Twitter, while blaming both “Model 3 bottlenecks” and the ongoing
humanitarian situation in Puerto Rico for the delay.

Earlier this year, Tesla announced plans to produce up to 5,000 Model
3s per month by the end of 2017, though the announcement was met with
skepticism at the time.

A report last week by The Wall Street Journal revealed the company is
producing major components of the car by hand, and confirmed production
is falling well short the stated goals.

Though Tesla claims the report overstates the extent of the problems
facing the factory, Musk did admit on twitter that the Model 3 is “deep
in production hell.”

Between the continued production difficulties and Tesla’s efforts to
send battery packs to Puerto Rico, the company decided to “recalibrate”
the timing for both Model 3 production and the truck’s official debut.

To sum up, Tesla is facing a combination of richly-valued stock,
overvalued stock market, and failure to meet its goals for this and
presumably the next couple of quarters. So it fits the profile of the
great company with internal and external problems that make its stock
price hard to justify.

Will it (and its Big Tech peers) be the next Big Short? That probably
depends on when the current bubble bursts and whether governments this
time around respond by directly buying large cap stocks. Those things
are unknowable, but right now the shorts have a lot of data points on
their side.

Full disclosure: Various members of the DollarCollapse staff are looking hard at shorting Tesla.

John Rubino runs the popular financial website He is co-author, with GoldMoney’s James Turk, of The Money Bubble (DollarCollapse Press, 2014) and The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street(Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

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