Yet another Valentine's Day has come and gone. The event saw numerous companies on the persistently frothy stock market get as much affection from investors as some people earned from their love-struck sweethearts.
Yet in the view of three Motley Fool contributors, certain stocks weren't exactly worthy of those gooey good feelings. They named Plug Power (PLUG), General Electric (GE -1.04%), and Tesla (TSLA -4.95%) as three companies that shouldn't have been gifted heart-shaped boxes of chocolates this year.
Good story, meet poor business
Jason Hall (Plug Power): I'm generally an optimistic investor. And I love a good story, especially one that includes doing something that would be very good for humanity at large. And the story for hydrogen is both exciting and one that would be wonderful for us all. Green hydrogen, a way to store emission-free wind and solar energy in a way that's both high-energy-density and highly portable, would be a massive step forward for global climate change, energy security, and cheaper energy.
And few companies have been better at telling that story as a means to raise capital than Plug Power over its history. And for a while, the story, along with some revenue growth, resulted in a stock that absolutely skyrocketed in 2019 and 2020.
Yet over the past few years, shares have come crashing back down to earth, from more than $70 at the 2021 peak to around $4 today:
What's gone wrong? In two words, capital allocation. Over that period, management has deployed most of the billions and billions of dollars it has raised in secondary offerings on projects that simply haven't begun to deliver for the company. It's gotten so bad that management had to add a "going concern" notice to its SEC filings, a warning that it doesn't have the capital or liquidity to remain a viable business for another year.
As a result, more than $30 billion in shareholder value has evaporated.
Could management turn things around? Sure. They have some facilities starting to ramp up that could lower costs. But the company is skating on thin ice with the sharks of insolvency swimming beneath it. I'm glad that I didn't fall for the story that so far doesn't have business results to back it up.
A shell of its once-great former self
Chuck Saletta (General Electric): Former industrial titan General Electric was the very first stock I ever bought on my own in my Roth IRA. I was incredibly proud of myself for wrestling control of my account from my former broker, doing a bit of research, and settling on that well-known behemoth of a company.
I originally bought those shares in June of 2002, spending $2,988 to buy them. Aside from the friction-related partial share losses from its reverse split and its various spin-offs, I still own the same position I bought back then. Unfortunately, if I add up the fragmented parts of what it used to be that I now own, it only adds up to around $2,100.
So yes, more than two decades after my purchase, my investment in what was once viewed as a virtually unstoppable titan of American industry is worth less than I originally paid for it. While I appreciate the foundational education, it gave me on investing in individual companies, I'm super glad I didn't fall in love with that stock and invest any more in it than I originally did.
Some of the key lessons I learned from that experience that still help me today include the following:
- If a company relies on financial engineering to make its numbers, things can get really bad when the debt market gets tight.
- Debt ratings are useful for initial screens, but they don't substitute for a decent look at a company's balance sheet and a basic understanding of how it makes its money.
- What a company does with its dividend can often tell a clearer story about its prospects than what its management says on its calls with the financial media.
These days I consider my investment in General Electric as tuition spent to help teach me to become a better investor. It's still a bit painful to look back and realize what I could have had if I had made a more successful choice of where to put my money. All in all, though, I did learn enough from it to successfully keep investing, even through some pretty rough patches in the market. That has certainly put me in a better spot today than I would have been if I had given up on investing entirely when times got tough.
Overhyped, over-rated, but not yet oversold
Eric Volkman (Tesla): It took some time, but the hype and excitement that helped boost Tesla stock is fading. Although the company certainly has advantages, I'm not convinced it deserved the heaps of investor love and devotion it somehow inspired.
It's important to remember, first and foremost, that while electric vehicles (EVs) are the favored alt-fuel transport solutions of the moment, they're not the only "green" option (as Jason mentioned above, hydrogen, for one, has its merits too). I feel that the big rally over the past few years in Tesla stock is based on the assumption that EVs are the only viable eco-friendly option for the future. They are not.
Meanwhile, the EV space keeps getting more crowded. These days there are numerous flavors of EV maker to invest in; luxury sedans, for example (Lucid Group), pickups and SUVs (Rivian), and even heavy-duty trucks (Nikola). Tesla is facing determined competition in every one of its product categories.
On top of that, it has to contend with the 300-pound gorillas that are the incumbent car makers. Ford, General Motors, and other established players have muscled into EVs and other alt-fuel tech, and they're not about to cede that market to Tesla, or any other upstart.
Lately, Tesla's most strategic moves have involved somewhat haphazard price cuts to various models. That's a sign of a company in defense mode, not the acts of a confident market leader. Not surprisingly, Tesla's gross margin has been dropping sharply, falling to less than 19% in its most recently reported quarter from the year-ago figure of almost 26%.
Finally, even though Tesla's share price has decelerated considerably of late, the stock's valuations are still awfully high. The price to sales ratio tips the scales at well over 6, while the PEG ratio clocks in at over 2.
Ultimately, while I like aspects of Tesla's business and still consider it a pace-setter in the EV world, it's not melting my heart as an investment.
