“The Austin-based fund manager is sitting out the rally that has nearly doubled Tesla’s stock price within a month. And he says it would be wise for others to do the same. “I think it’s super dangerous to buy in now hoping it will continue its meteoric rise,” Yacktman said in an email to Business Insider. “It’s getting to the point where Tesla is almost priced as if it will be the only electric car maker on the planet.” The breathtaking speed of the rally has been widely attributed to a so-called short squeeze. That’s what happens when a sudden price rally forces traders who had bet against a company to cover their position and buy its stock. Also, the fear of missing out has gripped retail and institutional investors alike and sent Tesla’s stock into the stratosphere. “With a market cap the size of several car makers combined, it makes me wonder if we have a new generation of investors that have forgotten how the late 90’s ended,” Yacktman said. That decade of course ended with a speculative bid for unprofitable companies that were touted as future mainstays of internet-based activities from web browsing to pet-food ordering. Fast forward to 2020, and investors are again overstating a company’s potential to grow its profits. “While it appears Tesla will no longer be reliant on the capital markets for survival, and while we can understand why the market is cheering Tesla’s volume growth opportunity, we think they are underestimating the enormous amounts of capital that will be required to achieve that growth,” Yacktman said. He added, “Top line revenue is great, but it doesn’t guarantee investors will prosper if it’s unprofitable growth.”
Yacktman Prefers “boring” Companies
Even a cautious investor like Yacktman acknowledges that Tesla has a few things going for it. There’s the first-mover advantage in an industry that will be important to how we commute in the future. Also, CEO Elon Musk is an innovator. The Austin-based fund manager is sitting out the rally that has nearly doubled Tesla’s stock price within a month. And he says it would be wise for others to do the same. “I think it’s super dangerous to buy in now hoping it will continue its meteoric rise,” Yacktman said in an email to Business Insider. “It’s getting to the point where Tesla is almost priced as if it will be the only electric car maker on the planet.” The breathtaking speed of the rally has been widely attributed to a so-called short squeeze. That’s what happens when a sudden price rally forces traders who had bet against a company to cover their position and buy its stock. Also, the fear of missing out has gripped retail and institutional investors alike and sent Tesla’s stock into the stratosphere. “With a market cap the size of several car makers combined, it makes me wonder if we have a new generation of investors that have forgotten how the late 90’s ended,” Yacktman said. That decade of course ended with a speculative bid for unprofitable companies that were touted as future mainstays of internet-based activities from web browsing to pet-food ordering. Fast forward to 2020, and investors are again overstating a company’s potential to grow its profits. “While it appears Tesla will no longer be reliant on the capital markets for survival, and while we can understand why the market is cheering Tesla’s volume growth opportunity, we think they are underestimating the enormous amounts of capital that will be required to achieve that growth,” Yacktman said.
He added, “Top line revenue is great, but it doesn’t guarantee investors will prosper if it’s unprofitable growth.” Yacktman prefers “boring” companies
Even a cautious investor like Yacktman acknowledges that Tesla has a few things going for it. There’s the first-mover advantage in an industry that will be important to how we commute in the future. Also, CEO Elon Musk is an innovative founder with a cult-like personality that helps Tesla sell more cars. But do these benefits and their prospects justify a 200%-plus price gain within six months? That’s a question Yacktman has asked and answered in the negative. A 200% jump in one of his portfolio’s holdings would certainly be nice. But Yacktman’s investing philosophy runs counter to such short-term spurts, and has helped his YCG Enhance Fund outperform 98% of its peers on three- and five-year bases according to Bloomberg data. He buys “boring” stocks — unflashy names like MSCI and Mastercard that have stood the test of time — while avoiding those that are chased by impatient investors. In his view, the behavioral tendency of wanting to get rich quick leads to a systemic overpricing of popular yet low-quality stocks. Meanwhile, boring, high-quality companies remain cheap and up for grabs.”
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The Morningstar Rating™ for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history, without adjustment for sales loads. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating™ for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating™ metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. The YCGEX Fund was rated against the following numbers of Large Blend Funds over the following time periods as of 03/31/2020: 1214 funds overall, 1127 funds in the last three years, and 982 funds in the last five years. With respect to these Large Blend Funds, YCGEX Fund received a Morningstar Rating of 5 stars, 5 stars and 5 stars for the overall, three-, and five- year periods, respectively.
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