Should You Go Long in These Speculative Stocks?
Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Some companies just can’t remain out of the news or controversies, depending on how one looks at things. Tesla Motors (NASDAQ: TSLA), SolarCity (NASDAQ: SCTY), and Molycorp (NYSE: MCP) are perfect examples of such companies. Sharp corrections, appreciations and crazy valuations--these stocks have it all. With some of these stocks advancing to record levels in the current rally, the debate about the true worth of these companies has come to the forefront. Here is a closer look at each.
Tesla Motors -- A valuable automaker
With its stock price doubling in the last month, Tesla has become a more valuable automaker than Fiat. Ironic as it may sound, Tesla has no car model it can boast of selling globally in major markets. The company produces only one model as of now, while another one remains under development. The funny thing with this gravity-defying valuation is that the company showed a profit for the first time during the quarter ended March 31.
It swung into profits and revenue jumped manifold, but there is no denying that a forward price-to-earnings ratio of 86 does not look very attractive. Even though the company adopts a direct selling approach to customers and does not intend to produce traditional vehicles, the auto industry is globally a highly cyclical one, and Tesla cannot escape this reality.
The company has a debt-to-equity ratio of 2.7 and its shares are selling at 62 times net asset value. Some of the valuation metrics will come down over the next few quarters, but these are still pretty high numbers--and let’s not forget that gravity wins eventually, even in the equity markets.
Musk effect at full play
SolarCity sells and installs solar panels and has been in the news lately because of a lease deal it has signed with Goldman Sachs. Under the agreement, Goldman Sachs will finance $500 million worth of solar-panel installations under various projects. Interestingly, the company's chairman is Elon Musk – the charismatic businessman who co-founded PayPal and who currently heads Tesla Motors.
Apart from the deal with Goldman Sachs, SolarCity’s shares are arguably driven by Musk’s headline-grabbing statements. With monthly gains of more than 150%, one would assume any stock would become expensive, and it is not very different in the case of SolarCity. The stock is currently priced at more than 20 times of its book value, while the price-to-sales ratio is also high at 29.
Rare earth metal producer Molycorp has seen wild valuations followed by a sharp correction that started in 2011 and stretched until 2012. It is only now that the stock has started looking up after beating Street expectations in the latest quarter and positing narrower losses. The stock has marched ahead 38% over the last month or so, but still trades at a 6% discount to its book value.
The prolonged correction caused this huge under-performance in the stock, which seems to be going away only now. However, this could very well be a value trap as the mining sector is still in the doldrums and huge discounts to book value are more of a norm than the exception.
Given the capital intensive business of mining, its debt-to-equity ratio of 0.9 does not appear to be very high, but the nagging worry remains about the business itself – whether the demand of rare earth metals will pan out as expected.
Foolish bottom line
On a whole, only Molycorp’s current market price looks inline with business fundamentals. This is not to say that Tesla and SolarCity have no room to rise further, but speculative interest seems to have taken over rationality in latter ones. Cautious investors would think twice before buying these stocks.
Tesla's plan to disrupt the global auto business has yielded spectacular results. But giant competitors are already moving to disrupt Tesla. Will the company be able to fend them off? The Motley Fool answers this question and more in our most in-depth Tesla research available. Get instant access by clicking here now.
Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors . The Motley Fool owns shares of Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!