Mark Spiegel’s Stanphyl Capital letter for the month ended January 31st, 2016.
Friends and Fellow Investors:
For January and year-to-date 2016 the Stanphyl Capital was up approximately 9.1% net of all fees and expenses. By way of comparison, the S&P 500 was down approximately 5.0% while the Russell 2000 was down approximately 8.8%. Since inception on June 1, 2011 the fund is up approximately 89.2% net while the S&P 500 is up approximately 59.3% and the Russell 2000 is up approximately 30.2%. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.) As always, investors will receive the fund’s exact performance figures from its outside administrator within a week or two.
Believing the broad market to be extremely overvalued within the context of declining earnings…
…which I expect to further decline as the world enters a recession…
…we came into January with very large short positions in the S&P 500 (SPY), Russell 2000 (IWM) and what I believe to be the biggest single-company stock bubble, Tesla Motors Inc. (TSLA). The fund was up in January’s downdraft because these shorts went down more than our longs did, and some of our longs even went up. Here are the specifics…
Stanphyl Capital Remains Short On Tesla Motors
We remain short Tesla Motors (ticker: TSLA; January close: $191.20) for myriad reasons. In January General Motors formally introduced its new Bolt EV which offers true five-passenger seating, a range of over 200 miles and a 0-60 time of under 7 seconds for HALF the price of the least expensive Tesla while matching its interior passenger space (albeit with less storage). Seeing as studies show that 15% of Tesla buyers come from a Prius and many others come from other inexpensive “eco-favorable” cars, I expect the Bolt to grab back a significant number of them—what I call the “stretch buyers” who paid up for a Tesla because they wanted an electric car with 200-miles of range; those people can instead now choose the much less expensive/easier to park Bolt which will be available late this year, a year before Tesla CLAIMS its “Model 3” will be available and—realistically—at least two years before it will REALLY be available. Additionally, as I pointed out two years ago and another Seeking Alpha author pointed out recently, there’s no way Tesla will be able to profitably sell its “mass market” car at the $35,000 (pre-tax credit) price it has claimed—a base price well into the $40,000s seems much more realistic, which would automatically make it much less “mass market.” Perhaps the most interesting thing about the Bolt is that its 60kWh battery pack (made by LG) weighs just 960 pounds while the 60kWh Tesla pack (when it was offered) weighed 1125 pounds, a significant disadvantage for Tesla. Even if the Tesla pack’s housing was somewhat handicapped by needing to be large enough for the 85/90kWh models and thus as a 60kWh “pureplay” its weight might be closer to the Bolt’s, the Bolt’s energy density-per-pound at the pack level seems to show that the assembly, housing and cooling complications of
Tesla’s method of wiring together many thousands of separate Panasonic cylindrical batteries vs. Chevrolet/LG’s much simpler use of just 288 prismatic cells makes Tesla’s first-to-market approach obsolete. As de facto proof of this, every manufacturer currently developing an EV has the option of using Tesla’s “thousands of cells” approach yet (as far as I know) none of them are; it thus seems clear that large-format prismatic batteries—not available with sufficient energy density at an attractive price when the Tesla Models S&X were designed—are now the superior approach and thus may render Tesla’s Gigafactory obsolete even before it opens.
Meanwhile, Tesla’s rollout of its new Model X is shaping up to be a disaster, with various enthusiast forums reporting myriad problems with its “falcon-wing” doors, seats and general build quality, as well as a very low confirmation rate for the refundable “orders” the company claims to have. And those orders that do exist are being delivered in ultra-slow motion as Tesla—which despite years of delays clearly did inadequate Model X testing—attempts to fix the vehicle’s problems (although of course its massive size problem is unfixable). In addition to these design and build-quality issues, the X’s $5000-$7000 premium to a comparable Model S sedan will be a huge sales-limiting factor, as nearly all of the luxury competition prices its premium SUVs considerably less expensively than its premium sedans. For instance, the most basic “X” with no options and only 220 miles of range (and unavailable until late this year) starts at $81,000 with only five seats standard; by comparison, a seven seat Mercedes GL starts at $65,000, a five-seat Porsche Cayenne at $58,000, a BMW X5 at $55,000 and the beautiful new (and award-winning) Volvo XC-90 at just $44,000.
In February Tesla reports its year-end financials and I expect Q4 free cash flow to have again been hugely negative, albeit somewhat improved from Q3 due to heavily discounted inventory liquidation in China (and thus at terrible gross margins even by Tesla’s phony metric which excludes engineering costs) and a one-time sales rush to beat an expiring tax incentive in Denmark. I thus expect Tesla to deliver 15,000 or fewer cars in Q1—at least a 14% sequential decline for this alleged “hyper-growth” company. Meanwhile in November Tesla reported a disastrous Q3 with a record-setting $595 million of negative free cash flow and– based upon ongoing costs vs. the amount set-aside for newly sold cars– what looks like a severely inadequate reserve for future warranty expense. (In October Consumer Reports finally acknowledged Tesla’s widely known reliability problems, and it isn’t just Consumer Reports that noticed, while a study released in December was the most damning one yet.)
The big picture issues for Tesla are twofold (note: these links are updated monthly): 1) The market is under the mistaken impression that it has significant & sustainable proprietary technology when it doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t , doesn’t and doesn’t in cars (in fact LG now offers a complete turnkey electric drivetrain to any manufacturer who wants one) and many of these EVs will be sold at or below cost (subsidized by the profits from their makers’ conventional cars), thereby creating intense pricing/margin pressure on Tesla; it doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t and