Tesla's Valuation Drives Me Crazy

NEW YORK ( TheStreet) -- I'm getting a very familiar feeling when I look at what's happening with Tesla ( TSLA).

I can remember back in March 2000 when the Nasdaq was breaking through 5,300 and dot-coms were trading on very, very thin air. In fact, that is about all they were trading on. Many of these recent initial public offerings had very little in the way of plans beyond the IPO moment.

The S&P 500 was trading at a PE ratio range in the mid-30s back then, and the norm for Nasdaq stocks was usually somewhere in the triple digits. Tech analysts and go-go mutual fund managers were the rock stars of the day. The saying going around the market was, "Valuation does not matter anymore!"

How could valuation not matter anymore?

Well, here we are an unlucky 13 years later and we still are not even close to repairing the damage that was done to the Nasdaq in the years that have followed its 5,300 peak.

Oh, we are finally closing in on 4,000, but 13 years to get this far? I guess valuation matters after all.

It seems that every so often investors somehow lose their sense of valuation when yet another bubble hits. Our two strongest emotions as human beings are fear and greed. We can do silly things when greed sets in.

Like buying shares of Tesla before everyone in America is driving a brand-new, shiny, red, electric car.

It is funny how greed can make us do silly things. It is like we have to get in before it is too late. Unfortunately, by then it is almost always too late!

Why am I picking on Tesla? If you follow me on Twitter, you will have found me warning about Tesla's chart and valuation for the last several weeks.

Data from Best Stocks Now App

I document every tweet about stocks that I send out on the Best Stocks Now App. I think that the record is perfectly clear on Tesla.

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!

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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