At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Did we say "buy"? Oops. We meant "sell."
Bad news for electric car fans, futurists, and green investors in general this week. One of the biggest backers of the movement to hybrid and electric vehicle technologies ... has just become its biggest critic.
I'm speaking, of course, of investment banker Morgan Stanley. For months, I've been highlighting (and criticizing) the analyst's gung-ho upgrades of everyone from A123 Systems (NAS: AONE) , which makes rechargeable batteries for General Motors (NYS: GM) , to Tesla Motors (NAS: TSLA) . I've warned that, until these firms prove they can earn a steady profit, "no one really knows what" they are worth -- and that it's irresponsible to urge investors to buy their stocks (especially when Morgan Stanley helped underwrite the IPO).
Morgan Stanley: a bad banker but a great ballet dancer
Seems the advice finally sank in. Spinning deftly on a dime yesterday, Morgan Stanley pulled its previous overweight recommendation for Tesla, and -- skipping right past neutral -- dropped its rating on Tesla all the way down to underweight (Wall Street speak for sell).
Why? Because Tesla, which the banker had previously suggested investors rush right out and buy, is in fact "not ready for prime time." Indeed -- the whole EV industry turns out to be performing weaker than Morgan Stanley previously promised. The analyst says that even 15 years from now, it's unlikely we'll see electric vehicles making up even 5% of global car sales. This revelation is bad news not just for Tesla, but for Nissan, GM, Ford (NYS: F) , and Toyota (NYS: TM) -- anyone who has committed to building electric vehicles in recent years.
It's probably even worse news for battery-making start-ups like A123 and Ener1, which hitched their wagons to a presumed surge in demand for rechargeable batteries. Meanwhile, larger companies like Panasonic (NYS: PC) and Johnson Controls (NYS: JCI) , while big players in the EV market, should suffer less thanks to their more diversified businesses.
A funny thing happened on the way to the downgrade
And yet, I can't help but notice that at the same time as Morgan Stanley reverses its position on Tesla's prospects, slashes its price target by 37%, and tells investors to sell the stock, it's still ... predicting the stock will hit $44 within a year. Which makes about as much sense as anything else Morgan Stanley is saying about Tesla today.
I mean, have you checked Tesla's stock price lately? (And maybe more importantly, has Morgan Stanley?) It's trading for $30 and change, meaning that the analyst is simultaneously telling us the shares are going to rise 50% in the next year ... but that you should sell the stock before that happens. Huh?
Stop the madness
Seems to me, there's only one logical explanation for Morgan Stanley's analytical schizophrenia. Basically, the analyst is telling us that while Morgan Stanley is still optimistic about the stock, the truth is that no one knows what will happen with Tesla going forward. CEO Elon Musk has promised to begin Model S sales next year and says the company's new electro-buggy will lift Tesla into profitability by 2013. Morgan Stanley avers that Tesla's performance with the car to date has been "near-flawless ... pre-production," and that "we expect the Model S to launch on time in July." If they're both right, if the profit number is big enough, and if Tesla can hit a fast-enough growth rate, the stock could be worth a big enough multiple-to-profits to make the shares worth $44.
For now, all we know for certain is that Tesla never has earned a profit before, is burning increasingly large piles of cash with each passing year, and at its current rate, will burn through all the cash in its kitty within 12 months. Plenty of reasons for Morgan Stanley to be skeptical. I only wonder why it took the analyst so long to notice them.
Not quite ready to gamble on an unprofitable automaker and a "not ready for prime time" technology? Can't say as I blame you. Why not try a few steady-eddy dividend payers instead? Read the Fool's new, and free, report on "13 High-Yielding Stocks to Buy Today."
At the time thisarticle was published Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 337 out of more than 180,000 members. The Motley Fool has a disclosure policy.The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of General Motors, Ford, and Tesla. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.