Berko: Tesla investment could be dangerous to your wealth
Friday, August 30, 2013 7:00 AM
Dear Mr. Berko:
I recently sold shares of Johnson & Johnson at $92. I had bought them on your recommendation last December at $71. Now I have about $9,000 to invest. What is your opinion of Tesla Motors Inc.? Would you advise purchasing 75 shares for a long-term investment in my individual retirement account if I would reinvest the dividends? And can you tell me why Tesla can’t sell its vehicles online directly to the consumer and avoid the expenses of opening a franchise dealership? It seems to me that the public would be able to buy a Tesla at a lower price and avoid the sales commission costs and franchise expenses.
N.C., Wilmington, N.C.
Selling Johnson & Johnson (JNJ-$86.94) is an unforgivable sin. Admittedly, the share price in the past dozen years hasn’t been much to call home about, even though revenues in that time frame have doubled, earnings have tripled and the dividend has increased fourfold. In fact, the values of most big pharma issues have been dead in the water during the past decade. However, the 30 percent increase in JNJ’s share value from your December price is a portent of things to come. Some investors are beginning to realize once again that proven management, quality revenues, quality earnings and strong dividend growth trump the hyperbole and tawdry testimonials of Wall Street’s “get rich quick” touts. Repurchase JNJ, and forget Tesla (TSLA-$165.78), a speculation so rank that, like a pack of cigarettes, it should have a “Dangerous to Your Wealth” warning label attached to its TSLA ticker symbol.
TSLA has opened about 30 stores in a dozen states. And residents of the remaining states must order a TSLA by phone or on the Internet. Most states have a gaggle of franchise laws barring General Motors, Ford, Chrysler, BMW, Toyota, Honda, etc., from selling directly to the consumer. These franchise laws go way back to the industry’s early days, when Henry “Old Sourpuss” Ford needed to persuade entrepreneurs to help him sell his Model T. And those state laws may be justified because without them, the automakers could easily use their tremendous economic clout to bypass the middleman and sell vehicles for less than their independent franchisees. And because most state legislators depend on significant political contributions from franchised dealers, they agree that TSLA’s direct sales violate the franchise laws. These franchise laws increase the cost of your Lincolns, Buicks and Lexi because they insulate the franchised dealers from the e-commerce revolution, which has hurt Barnes & Noble, Best Buy, Sears and other retailers. So according to an angry reader in North Carolina, your Republican-controlled state Senate passed a law banning TSLA from selling its cars online. If TSLA were permitted to sell its cars online, the auto manufacturers could also establish their own online retail networks and sell directly to the public. So if your state allowed TSLA to establish a franchise, it would open the door for GM, Ford, Chrysler and others to create their own sales subsidiaries and sell directly to the consumer. The Big Three automakers flirted with this idea in the 1990s, but a rancorous and strident dealer backlash persuaded them to change their tactics. TSLA’s lawyers argue that this is illegal restraint of trade and that it violates interstate commerce laws.
TSLA makes sensational cars, and the reviews have been rave. The Model S fully charges in less than 25 minutes and goes from zero to 60 in 4.2 seconds, and its 85 kilowatt-hour battery has a range of more than 260 miles. But this company may not be “honestly” profitable until September 2021 or March 2022 and may not pay a dividend until 2026. Therefore, you might have to wait 13 years before you would reinvest any dividends. Frankly, I think anyone who buys this stock has to be addled and wacky to pay $166 a share for a company that has no earnings and produces $70,000-$125,000 cars that many banks won’t finance. TSLA is not an investment; it’s a speculation. But the cars are dynamite.
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