It is not a popular thing to warn folks about a popular stock. I was receiving a lot of nasty tweets in return, but the evidence was getting so darn compelling that I felt like I had to speak up. I was there in 2000 and apparently a lot of Tesla investors were not. I could not argue against the performance of the stock. It has blown away the S&P 500 over the last three years. The stock has delivered 93.4% per year while the market has delivered 12.9%. But then again so had "almostanything.com" back in the year 2000.
Data from Best Stocks Now App How about the performance over the last 12 months? The stock is up an incredible 461% since this time last year. It is hard to convince investors their favorite stock is entering into rarified air after such phenomenal returns. But there is this inconvenient truth called valuation that seems to be getting "musked" over. Data from Best Stocks Now App Looking at it from one angle, the stock was trading at 103.4 times earnings before Wednesday's trip to the woodshed. Where have I seen triple-digit PE ratios before? With anticipated earnings growth of 18.7% per year over the next five years, the PEG ratio worked out to 5.53, a level that I recall all too well when the Nasdaq was trading at 5,300 some 13 years ago. If the valuation was not scary enough, the chart was the most frightening thing I saw this past Halloween. Courtesy of StockCharts.com At any given point in time, a one-year stock chart can only be in one of four formations: a very dull sideways trend which I tend to avoid; a downtrend which I avoid like the plague; an uptrend which is my sweet-spot as long as it is not too extended; and the most dangerous trend of all-an extended uptrend that is rolling over at the top.
This is the one you want to avoid at all costs! I saw a lot of these back in 2000. I also saw it in Apple ( AAPL) back in fall of 2012. A decent technician gets out of the way of these types of trends. Stubborn fundamentalists hang in there insisting that the market has it wrong. That is why I like to combine fundamental with technical. It gives me more evidence to consider. I am a very, very demanding investor. I must have performance numbers on a stock that show me that it is far superior to the rest of the market. Sorry, Cisco ( CSCO). Sorry, Intel ( INTC). But I also demand a reasonable valuation. I like stocks that have the potential to double over the next five years. The numbers have to support my equation. Valuation without performance is like shopping at J.C. Penney. Lastly, I demand a healthy a stock chart. This really narrows the field down considerably. In fact, usually only 200 to 300 stocks make my watch list of the 3,600-plus that I track on a daily basis. Tesla was ranked #1,015 on Tuesday. Not even close to being worthy of my requirements.
Data from Best Stocks Now App I warned as many as would listen. Valuation still matters! Follow @billgunderson This article was written by an independent contributor, separate from TheStreet's regular news coverage.