Stock prices are going to become more volatile as we get closer to the November elections. Whenever stocks fall because of political factors it has been great time to buy stocks. Now is the time to do the research so when the time comes, we can step confidently into the market to buy when everyone is selling. Three stocks my managers are ready to buy on the next downturn are Tesla, Nvidia and Facebook. Here’s why.
Here’s how it works: The production line is run at maximum output, building cars at a rapid rate and then it’s shut down to inspect the vehicles for any flaws. The manufacturing process is then retooled to fix any problems that have been uncovered after which the production line is turned back on, and it’s running at full capacity again.
Production may be slow for the first few months, but once a flawless run has been achieved, you can expect an instantaneous ramp-up, not a slow gradual one.
In the last week of Q2, Tesla hit its production goal of 5,000 Model 3s per week, an annual rate of about 250,000. Elon Musk has said the goal is to produce 500,000 Model 3s annually.
To put this in perspective, Tesla’s annual deliveries since 2012, in round numbers are: 2,650, 22,300, 33,000, 50,000, 84,000, and 101,000 (2017). In the first half of 2018, Telsa delivered over 70,000 cars.
The production ramp-up has taken longer than we expected, but it appears that the worst is behind us. When Tesla fixes the bugs that turned up, we expect production to continue to ramp-up quickly towards the annual goal of 500,000.
In an industry with high fixed costs, ramping production is the key to reducing the manufacturing cost of each car. Going from 101,000 cars in 2017 to an annual rate of 300,000 cars in 2018 is going to make their financials look a lot better.
Tesla was at $280 in May when it didn’t look like they could make 5,000 Model 3’s per week. That turned out to be a good entry point. The stock is at $322 now, but could easily return to $280 if the market corrected.
Glen Brownworth has been pounding the table for Nvidia for years. He first bought Nvidia at $21 in August 2003. At the beginning of the year, Nvidia was at $200.
In May, Nvidia reported revenue grew 66%, and earnings-per-share soared 151%. The stock is up about 26% this year to $253.
Because the stock has not gone up as much as revenue and earnings, Nvidia is now cheaper than it was at the beginning of the year. It’s price-to-earnings ratio has fallen from 60 in January to 44 today.
Although 44 is a high multiple, the market has shown it is willing pay much for solid growth. Two examples that come to mind are Netflix and Amazon at 249 and 275 respectively.
One reason the stock has not done even better is that the company said sales to crypto-currency miners had peaked and would decline from here. Crypto-currency mining, however, was never the big attraction.
For us, the big attraction is that Nvidia’s products are better suited for artificial intelligence applications than Intel’s. The first mainstream AI applications utilizing Nvidia’s technology have not yet hit the U.S. market. This is the main reason we think the stock has not already gone up more and thus still has a lot of room to run.
Nvidia fell to $214 in March when volatility returned to the market. If the market tumbles on fears of a trade war, or a polarizing election, Nvidia at $214 would be a good buy.
John Archer, one of my managers, believes Facebook at $203 is at the low end of his estimate of fair value. Based on Facebook’s double digit growth rates (54% in 2016 and 47% in 2017) John think’s Facebook’s fair value is closer to $250.
The market is challenged when it comes to valuing fast growing companies because the presumption is that growth will slow down. However, John in confident that Facebook’s growth will continue because;
Facebook essentially has no real competition, benefits from the powerful “network effect”, has no debt and had $42 billion in cash at 12/31/17. It’s one of the strongest companies out there.
John first bought Facebook for his TAB fund in November 2016 at $122. He increased his position by 50% in July 2017 at $163. Two months later he increased his position by 66% paying $170.
If you already own Facebook, John is not buying at the current price. However, if Facebook were to fall back to the $170 level in the next downturn, that would be a good entry point for new investors.
Is it crazy to buy stocks when the market is in a panic? It’s not crazy if the reason for the panic has nothing to do with the stocks you are buying, and you’ve already done your homework on the company.
Everyone wants to buy low and sell high. But not a lot of people can bring themselves to do it because when stocks are cheap, there is usually something to be afraid of.
Before the market’s next panic attack, do the homework on the stocks you want to buy.
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