Elon Musk Sued By SEC: Beware of “Story Stocks” in Your Portfolio

Elon Musk is off the rails.

The Chairman and CEO of Tesla TSLA is having quite a summer. Over the last three months, Elon Musk called a British rescue diver a “pedo,” tweeted he had “funding secured” to take Tesla private (not even close), and smoked marijuana and drank whiskey on Joe Rogan’s filmed podcast.

His actions have ignited a firestorm of repercussions:

  • After doubling, tripling, and then quadrupling down on his “pedo” comment, Musk is now being sued by the rescue diver for defamation.
  • The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have both opened investigations into Musk’s funding tweet.
  • Tesla’s Head of Human Resources and Chief Accounting Officer both quit the day after the marijuana incident (the Chief Accounting Officer had been at Tesla for a month).
  • Earlier today, reporters found that Tesla’s Senior Director of Production and Quality also just left the firm.
  • UPDATE: And just moments after we published this article, the Securities and Exchange Commission (SEC) announced they are suing Elon Musk for fraud over his “false and misleading” funding tweet.
  • They are asking that Musk be removed as Tesla’s CEO and banned from holding a corporate officer or director position at any public company.
  • Tesla stock is dropping fast, down 12% already.

Now I have nothing against Elon Musk. And honestly, I’m not judging the character, motivations, or ethics behind his recent actions. But I do find them unacceptable given he is the CEO of a $50B Fortune 500 company that employs nearly 40,000 people.

You’ve heard of “conduct unbecoming an officer”? I’d call this “conduct unbecoming a CEO.”

That said, I’m not interested in criticising Mr. Musk’s behavior. Instead, I want to focus on the most important investing lesson from the whole fiasco: Beware of “story stocks.”

Why Buy Tesla Stock?

When you invest in a stock, you have to ask yourself two critical questions:

  • “Why am I buying this company?”
  • “Is this really the #1 best stock I can buy right now?”

 It seems obvious, right?

But ask yourself, why have people been buying Tesla stock?

Is it for the earnings growth? The company lost $2.7B over the last 12 months and has never turned a profit.

Is it for their financial strength? They have $2.2B in cash and $9.6B in long term debt.

Is it for their dividend? Nope, they don’t offer a dividend.

Is their stock undervalued? According to my analysis, it’s one of the most overvalued stocks on the entire market! (It’s hard to be undervalued when you never make a profit).

Is it for their revenue growth? Yes…we’re getting warmer! The company has grown revenue 95% per year over the last five years.

I think the real reason people buy Tesla stock is because Elon Musk is a celebrity, a serial entrepreneur, and a fun guy to believe in.

And there’s good reason to see Musk as a technology wizard and an eccentric visionary:

  • He helped start PayPal
  • He’s trying to colonize Mars with SpaceX
  • He founded SolarCity to slow global warming
  • He dreamed up Hyperloop, a high speed transportation system that moves people in capsules through long tubes
  • He founded Neuralink and OpenAI, artificial intelligence companies
  • Recently he’s been wielding flame throwers to promote his Boring Company, founded to end city traffic

Elon Musk is a fun, wacky, possibly brilliant, mad scientist.

But is that really a good reason to buy Tesla stock?

Beware of “Story Stocks”

Right now, Tesla is a classic “story stock,” which Investopedia describes like this:

“A story stock is a stock whose value reflects expected outperformance (or favorable press coverage) rather than its assets and income. A story stock’s share price is often bid up on overly optimistic expectations about its potential profits. Its valuations are generally out of line with its fundamentals, since investors will pay a premium for the shares to participate in its growth prospects.

Many story stocks are in the dynamic technology or biotechnology sectors due to the lure of purchasing shares of an innovative company that may discover the cure for cancer or invent a new fuel source.”

With story stocks, the price is often tied more closely to perception than to the fundamental reality of the company. In Tesla’s case, investors are more interested in watching Elon Musk than the company’s bottom line.

Personally, I have no interest in owning Tesla stock. Having analyzed their financials, it’s not a good stock to buy right now. But even aside from their financial weakness, why would you want to own a company with so much risk tied up in a single employee?

Do you want to own a stock where if one erratic employee who lives in the spotlight happens to tweet something wrong you might lose your money?

If Elon Musk were to leave Tesla or become an unreliable CEO, what would happen to Tesla’s stock. I’m guessing it wouldn’t do too well. (UPDATE: We’re getting a glimpse of that now as Tesla’s stock plummets on news the SEC wants to remove him as CEO.)

Look for the #1 Best Stock to Buy

You can invest your money anywhere; in any number of companies, in any number of industries. So is Tesla really the #1 best stock to buy with your hard-earned cash?

Why place a bet on possible amazing future performance when you can have strong, steady, solid performance right now with any number of other great companies?

Stories are fun. But when it comes to my money, I’d rather have reality.

Why not instead invest in a company with growing revenue AND growing earnings? And what if that company offered a dividend too? And what if they had a mountain of cash? And what if they were ALSO undervalued?

Too good to be true? They’re out there. You just have to know where to look.

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Author

Todd Lincoln

Author

Passionate stock market investor with deep experience trading small cap, dividend, and growth stocks.

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