Worries about missing out makes “disruptive” growth stocks such as Tesla and Amazon hard to ignore. However, investors risk overpaying for hopes that are undeliverable – and missing out in overlooked bargains at the same time.
An example of this is car manufacturers. Investors tend to disregard the established companies because of fears about an impending “death of petrol”, exposure to consumer credit risks, the threat of litigation over emissions, and their noted inability to fight back against other companies like that of Tesla.
But unlike Tesla, shares in many of the traditional car manufacturers are cheaply priced by the stock market.
Several of the incumbents offer attractive dividend yields and trade at a price to earnings ratios in the middle single digits. Tesla, on the other hand, has a £45bn market value.
General Motors has a p/e ratio of 6 and a yield of 4.2pc and is estimated at £39bn, while Ford a market value of £33bn and a yield of 5.5pc and has a p/e of 8; for BMW the values are 7, £47bn and 4.5pc.
Last year, Ford sold more than six million cars and generated £3.6bn in profit, while Tesla shipped lower than 100,000 and incurred a loss of £520m.
Investors are buying stocks from Tesla because of hopes for what it can do in the future with battery storage, autonomous driving, electric cars, and more.
Baillie Gifford’s fund manager, Tom Slater, announced that he had invested in Tesla because of its willingness to take risks, investment in long-term projects, and its ability to develop a high-end luxury car brand quickly.
But does the distance in valuation make the old firms a bargain?
Manager of the £3.7bn Artemis Global Income fund, Jacob de Tusch-Lec, stated: “Nobody will deny the negatives [about the incumbents], but if there is no recession around the corner you can pick these stocks up at bargain prices right now.”
The manager declared that it was “not yet clear” if Tesla was going to out-compete the stable car giants.
He continued that the market was pricing in both a belief that traditional car makers weren’t going to fight back and a rapid transition to electric and autonomous vehicles.
“When the major car makers want to compete, they can give Tesla a run for their money, but for now they are a bit on the slow side,” said Tusch-Lec.
“It’s not like Tesla is going to make electric cars and car makers that have existed for 100 years will just roll over. They have built electric technology, they can team up with other firms, and they have distribution networks.”