Investors vote with their shares

J.P. Szafranski, BridgeTower Media Newswires

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.”

So said legendary investor Benjamin Graham. We stock market investors have the right to vote each trading day through buying, selling, or “HODLing” freely tradeable shares from companies of every size and industry.

While many rational strategies and motivations exist for taking action, like portfolio rebalancing, tax-loss selling, dollar-cost-averaging, etc., a vote on the prospect of a stock’s potential future price compared to its current price should lie at the root of each investment decision. The mosaic of differing investor opinions driving votes in each direction makes a market. The intangible construct of investor sentiment plays a meaningful role in the voting machine.

What about the long run’s weighing machine? Investor sentiment matters much less in the long run. In the long run (i.e. years, full market cycles), the market asks “Where’s the beef?” and sorts out stock prices based on companies’ ability to earn a profit on the capital that’s been invested on behalf of shareholders.

Let’s take a look at how the market is voting recently on some auto manufacturing stocks. Auto manufacturing is a notoriously capital intensive enterprise with a checkered history of poor profitability over lengthy time periods. These facts help explain why Ford Motor Co. and General Motors currently trade at a price-to-earnings ratio (P/E) of around 11 times the Bloomberg consensus earnings estimates for 2021, while broad market indices like the S&P 500 Index are much more highly valued at a P/E of 23 times estimated earnings.

Then there is Tesla Inc. Tesla can be credited with forcing its competitors to reckon with the electric vehicle concept. Tesla and its vehicles have a community of avid enthusiasts. Its U.S. market share has grown by a factor of 10 from 0.1% in 2014 to over 1% by 2019, according to Ward’s New Vehicle Registration data. Tesla currently trades at a P/E of near 150 times the Bloomberg consensus 2021 earnings estimate. It is pretty popular among stock market voters.

Voters purchasing shares of Tesla might contend that the company could yet again grow its market share by a factor of 10, with ballooning profits along the way. Another oft-cited bullish take is that Tesla is a technology company that happens to manufacture cars. Perhaps they will perfect self-driving technology and turn their vehicles into robotaxis that generate cash flow and appreciate in value as CEO Elon Musk has posited.

The best guess of Wall Street analysts is that Tesla will succeed at rapidly growing profits, with consensus estimates for earnings per share in 2028 at $45.93 per Bloomberg, up by a factor of 10 from 2021’s estimates. That equates to a P/E ratio of 15 based on today’s price and 2028’s projected profit. How does that compare to Ford and General Motors? Analysts project more modest profit growth for those two with P/E’s of 5.2 and 8.4 respectively based on 2024 earnings (analyst estimate data for years beyond 2024 is quite scarce).

If this version of the future plays out, a larger and more mature Tesla would remain valued at 2 to 3 times the P/E ratio of Ford and General Motors based on today’s voting machine prices.

That seems a little steep, but Tesla has defied expectations before. As always, the weighing machine will sort things out.


J.P. Szafranski is CEO of Meliora Capital in Tulsa (