I'm a buy-and-hold investor at heart who likes to let my winners run. That means I usually don't sell stocks after a big run-up since I'm banking on even greater gains in the decades ahead. However, that's not a rule set in stone but more like a guideline. If a stock soars to an uncomfortable level, I will sell.
That's exactly what I did with a portion of my Tesla (NASDAQ: TSLA) position earlier this week. Here's why I decided to cash in on some of my Tesla stock.
Sizzling stock price performance
Shares of Tesla are up a dizzying 261% this year and nearly 500% over the past 12 months. That monster rally has pushed the company's market value up to more than $280 billion. That makes it the most highly valued car company in the world by a long shot as it's worth roughly $100 billion more than its next largest rival Toyota (NYSE: TM). It's also now light years ahead of other leading car manufactures like Ford (NYSE: F), GM (NYSE: GM), and Fiat Chrysler (NYSE: FCAU).
Strip out Toyota, and Tesla's valuation is almost more than the combined value of the rest of its competitors.
That sky-high valuation comes even though it only delivered about 90,000 cars during the second quarter. For comparison, Toyota sold more than 148,000 vehicles in North America alone during June and 347,500 units overall that month. It's also worth noting that Toyota makes a lot of money -- it projects to generate $4.66 billion in operating profit this fiscal year despite the COVID-19 impact -- while Tesla only made a small $16 million profit during this year's first quarter.
On the flip side, Tesla does boast having a higher gross profit margin (20% in the first quarter vs. 17% for Toyota and less than 10% for the big three U.S. automakers). That should drive fast-paced profit growth in the coming years as the company ramps up vehicle production. Still, investors are more than pricing in this future upside into the current valuation. That has started making me uncomfortable with my position, especially as Telsa grew into one of my largest holdings.
Even Elon Musk thinks the stock value is crazy
Most CEOs believe the market has undervalued their stock. However, that's not the case with Tesla CEO Elon Musk. Back in May, he tweeted that "Tesla stock price is too high imo." At the time, shares were around $700 apiece. It has gone on to more than double from that price in just the past month and a half.
Meanwhile, an analyst recently put out a bullish report on Tesla by more than doubling the research firm's price target on the stock from $939 a share to $2,322 per share. In response to the report, Musk tweeted, "wow." While Musk's comments could be for show, he does seem surprised by how much the stock has run-up in the past year.
To Musk's remarks into perspective on his view of the company's value, he tried to take Tesla private at $420 per share in August of 2018. That seemed like a stretch price at that time since shares were in the lower $300's, but that price was closer to where Musk valued the company based on Tesla's future potential.
With even the CEO thinking the stock has become wildly overvalued due to what seems like an overly optimistic outlook on what's ahead, I felt that now was a good time to take some money off the table.
Letting the rest run
There are many reasons to sell a stock. In this case, I wanted to rebalance my portfolio after Tesla became an outsize position following this year's scorching hot run.
However, because I'm not an all-or-nothing kind of guy, I didn't sell my entire Tesla stake. Instead, I cashed in on enough shares to feel more comfortable holding the rest through the future ups and downs. If the Tesla bulls are right, then I'll still be along for the ride. Meanwhile, if shares dive, that drop won't have an outsize impact on my portfolio's performance.
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