Continuous Disclosure: The speculative stocks pulling millions from Kiwi investors

Investors are responding to record low interest rates by taking a punt on some highly speculative stocks – and there’s one brand that’s particularly alluring.

Data released by retail investment platforms Sharesies and Hatch show that New Zealanders have invested more than $160 million in electric car company Tesla.

Sharesies co-CEO Leighton Roberts says that about 20,000 local investors have put US$30m ($42m) toward Tesla since the company’s shares became available on the platform in August last year.

The business led by Elon Musk has also been a huge hit on Hatch, where Kiwis have invested almost $120m in the much-hyped stock.

Hatch general managerKristen Lunman says Tesla has emerged as the single most popular stock traded on the platform since 2018, coming in ahead of a tech-heavy pile including another electric car make, Nio, as well as Apple and Amazon.

“I’m not surprised Tesla is our most popular share,” Lunman says.

“Kiwi investors have told us that they believe in Elon Musk’s mission to change the world with long-range electric vehicle and battery technology.”

Tesla has also emerged as one of the most popular stocks internationally, with retail investors piling in through trading platform Robinhood in the US market.

The company recently hit key production milestones and is tipped to maintain profitability in the coming years, but analysts have long expressed concern about Tesla’s valuation.

Over-hyped?

Tesla’s stock price has exploded from about US$88 at the beginning of January 2020 to US$844 this week, giving the company a market capitalisation of US$800 billion and pushing founder Musk ahead of Microsoft’s Bill Gates and Amazon’s Jeff Bezos in global wealth rankings.

Tesla’s current valuation is greater than that of Toyota, Volkswagen, General Motors, Daimler, Hyundai, Ferrari, Volvo, Great Wall Motors and Honda combined – despite the fact that many of these companies have made long-term investments in electric vehicles themselves.

Viewed another way, Tesla’s market valuation is currently five times that of McDonald’s – a company that has consistently pulled in an annual gross profit of over US$10b ($14b) over the past decade.

Analysts and media columnists have made no secret of their scepticism about the carmaker’s inflated valuation.

“Tesla continues to produce more irrational exuberance than vehicles,” scoffed anAustralian Financial Review column in December last year.

“Old-school analysis finds nothing in Tesla’s fundamentals to justify a valuation of 141 times forward earnings. The stock even looks expensive if you believe the group could monopolistically supersede the world’s traditional carmakers.”

These comments also come at a time when market watchers are increasingly using the C-word – for “crash” – about markets full of grossly over-valued companies.

This month, veteran investor Jeremy Grantham, chief investment strategist at GMO, told the Telegraph that the US equity market was now more overvalued than it was on the eve of the Great Crash of 1929 and that it was inevitable the bubble would eventually pop.

Grantham went on to warn that the cyclically adjusted price-to-earnings ratio – a measure that compares corporate earnings over the last 10 years with the price of stocks – was edging towards record levels last seen during the dotcom crash of 2000.

The $160m in local money invested in Tesla through Hatch and Sharesies comes largely out of the savings of retail investors, hoping to make better returns than they can from record low interest rates.

So what happens if it all comes crashing down? How much will this hurt the Kiwis betting on continued growth in the coming years?

Tom Hartmann, personal finance lead for the Commission for Financial Capability, says it’s difficult to determine how much harm could be caused by a crash in Tesla stock without knowing each investor’s personal circumstances.

“It might be a small part of someone’s portfolio or it might be a large part of someone’s portfolio. They might know about the additional risk they’re taking on or they might not know.”

Hartmann says it becomes a worry when someone is speculating with money that’s intended for something like paying a deposit on a house or covering the kids’ education fees.

He urges investors not to simply follow the exuberance of a crowd gathered online and to look for a range of analysis and opinion before deciding to invest in a certain stock.

“You don’t have to look too far to get different opinions,” he says.

“Remember, it wasn’t that long ago that the online community was calling on people to short Tesla. They hated it. If you get a variety of voices, that can help you make a decision.

“The danger is when everyone is saying the same thing and everyone is jumping on the same bandwagon and no one is actually coming in with a variation.”

Unscrupulous behaviour

The growing prominence of investment chatter on social media platforms has caught the eye of New Zealand’s market watchdog.

“The [Financial Markets Authority] is concerned about the possibility that some investors might make investment decisions based on content in social media chat rooms,” a spokesman from the regulator told the Herald.

“Internationally, there’s been examples of some ill-informed and even unscrupulous speculation online.”

The spokesman adds that the FMA has also set its sights on the issue of deliberate misinformation being dispersed online.

“We would also be concerned if there was evidence that people were making statements on social media about a stock that they know, or ought to know, contains information that is false or misleading,” the spokesman said.

“This can amount to information-based market manipulation.”

Under New Zealand law, there are both civil and criminal sanctions available in situations where there is evidence of deliberate intent to manipulate share prices.

Turners upgrade

In keeping with the automotive theme – albeit with a move to a more traditional route – Jarden has updated its forecasts for Turners Automotive after the company revised its earnings guidance this week.

Turners, which is involved in car auctions, vehicle finance and insurance, now expects its net profit before tax to be within a $33m to $35m range, with trading exceeding expectations across the board.

Jarden rates Turners as “outperform”, with a target share price of $3.85 against its latest price of $xx.xx.

The broker expects Turners to experience “meaningful” earnings per share (EPS) growth over the coming years.

“Our updated forecasts see compound growth in EPS of 7.7 per cent per annum over the next five years driven primarily by earnings growth in finance and improved margins in auto retail,” Jarden said in a research note.

Jarden upgraded its 2021 net profit before tax forecast for Turners to $34.4m from $33.1m on increased finance receivables and a modest increase in auto retail sales margin.

– Additional reporting by Jamie Gray.

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