An investor crushing 98% of his peers told us why Tesla's meteoric rise echoes the dot-com bubble era - and warns it's super-dangerous to buy now
- It is dangerous to buy Tesla's stock now with hopes that it will continue its wild ride higher, says Brian Yacktman, the founder of YCG Funds.
- The stock's pop this week has widely been attributed to a short squeeze, as well as investors' fear of missing out.
- The fund Yacktman manages has outperformed 98% of its peers on three- and five-year bases by investing in "boring" companies.
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Brian Yacktman is among the 10 best-performing mutual fund managers of the past year - and not because he is riding Tesla's surge.
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.
