Tesla is the most dangerous stock for 2020: Expert

New Constructs CEO David Trainer joins Yahoo Finance's Kristin Myers to discuss his outlook on Tesla after the company announced a 5-for-1 stock split.

Video Transcript

KRISTIN MYERS: So, David, first on that stock split, how important is that news given the access to fractional investing that we're seeing over at Robinhood, or is this more about the psychology of being able to actually afford Tesla now? Some younger folks, some other mom-and-pop investors, that are saying, "Finally, I can actually purchase some Tesla stock."

DAVID TRAINER: I don't think it's news. I think this is all just another way to lure unsuspecting investors into what is a very dangerous stock, what we consider to be the most dangerous stock for 2020. When things get this disconnected from fundamentals, I'm not trying to say the momentum investors won't keep pushing this baby going, but I think for those who have fiduciary responsibilities, they have to take a long, hard look in the mirror as to whether or not they can recommend or hold the stock for clients, given just how ridiculous the valuation has become and the company's inability to meet either its long-term or short-term profit and production goals.

KRISTIN MYERS: So talk to me more about that bearish call, because bears have lost time and time again when it comes to Tesla, especially recently. But is that call specifically on that almost decoupling from reality that this stock seems to have right now?

DAVID TRAINER: My call is really about fiduciary responsibilities. Look, I don't want to step in front of the train any more than I already have with respect to the momentum investors and Tesla. It's more just a warning shot to those who, again, have fiduciary responsibilities or those who actually do care about the fundamentals. Because the stock is really utterly disconnected.

The production goals or the production implied by the current valuation is 1,500% above where Tesla is now. It's more than double what the incumbent automotive automakers will be producing. It overlooks the fact that the incumbents are going to be producing over three million electronic vehicles by 2025. It overlooks the fact that there are other upstart electric vehicle carmakers that are also scrambling for market share. It implies Tesla's going to have something like 50% market share in electronic vehicles at an average selling price that's 20, 30, 40, 50% above the normal average selling price of cars.

However you break down the numbers, there's no way to make a straight-faced argument in front of a client, for that matter, in front of a jury for owning the stock once it blows up, except that everybody else did it. And that's just not going to hold water in a fiduciary relationship.

KRISTIN MYERS: I mean, David, that is a headline right there, most dangerous stock. I can't believe I'm actually going to try to play the bull case here. I feel like I'm usually always the naysayer on the panel.

But I mean, Tesla is far ahead of a lot of its competitors when it comes to its innovation. We are seeing regular car makers for GM trying to chase Tesla right now. Other EV car makers right now just cannot catch up. It cannot be understated the kind of innovation and tech that Tesla has been able to pull and how far ahead that they're going to be going forward. Are you seriously this-- you're this down on Tesla right now going forward?

DAVID TRAINER: Yeah, I disagree with how far ahead they are in technology. Their self-driving technology is overstated. They're even getting in trouble with the advertisers, with the federal transportation board, because they're overstating the capabilities of that. It's not that technology is not any better than Waymo and not meaningfully better. It's worse than Waymo. It's meaningfully better than a lot of the other incumbent carmakers' technology.

And I think what you have to keep in mind here is that just because Tesla is ahead, doesn't mean they stay ahead. So the incumbent automakers move at a different pace. They bring scale and distribution in a way that Tesla can't match. So when GM decides to really get in to electronic vehicles, it doesn't just flip a switch and change its factories that produce millions of cars a year. It's easy profit for Tesla to do that, because they're producing just thousands of cars, and just recently hundreds of thousands of cars per year.

So when GM, Ford, Toyota, et cetera, when they get in 2025, they're getting it with scale. And it takes time to make those conversions of manufacturing capabilities to produce millions of electronic vehicles. So it appears that Tesla's way ahead, but they're really not.

It's sort of a tortoise and the hare race. The hare looks like it's way ahead, but the tortoise is just-- is gradually and steadily moving along. And when they do enter the market, they're entering it with unprecedented scale, which means they can produce higher quality cars at a lower cost.

They've also got a distribution network that Tesla can't match. How many Toyota or GM dealerships do you drive by every day when you're just going through town? How many power or electronic power stations can they put in those existing distribution networks? How much easier can they push the sale of electronic vehicles than what Tesla's done?

They're following-- they're practicing the fast-follower strategy, which means they don't have to put a bunch of R&D into creating a market. Tesla's done that. They just come in later when the market's already created with a better cheaper car.

KRISTIN MYERS: Well we'll have to see if the tortoise manages to overtake that hare. I want to switch off Tesla. You said that there's even more upside ahead as investors realize earnings aren't as bad as analysts had expected. I'm wondering what you see is the big catalyst going forward. Is it all about the vaccine? Is it about the fed? What are you seeing up ahead?

DAVID TRAINER: Well I think we've seen a lot of-- that piece we wrote after first quarter earnings pointed out that earnings weren't nearly as bad as consensus or reported numbers suggested. Because consensus and reported numbers had a lot of unusual or one-time losses buried in those numbers. And when you strip out the one-time losses and gains to get to a more normal core earnings number, which is what people think is out there in consensus, but it's not. And there are studies that prove that analysts don't catch a lot of these unusual items.

But when we do catch them, and when we pull them out, we saw that earnings weren't nearly as bad as analysts and companies were reporting. And they weren't going to be nearly as bad as consensus was expecting. And we think we've seen that play out in the last couple of months as the markets rallied higher as companies have reported second quarter earnings.

Going forward we think that it's harder and harder to find more juice to keep the stock market going up, given how much it has risen. Instead we think there's going to be more of a rotation around it-- out of the stocks that have had meteoric or maybe too much of a rise, like a Tesla. Why keep taking-- why putting more risk-- why keep putting more risk on the table with Tesla, when you get into stocks like Intel that are the opposite where they've got huge amounts of cash flows, huge amounts of R&D spending capability, while still being cash flow positive? An evaluation that implies profits are going to permanently decline by 20%, whereas with Tesla you've got valuations-- a valuation that implies profits are going to be 1,000% greater.

So it's like-- at the end of the day, if you really want to be honest about your investing activities and not just play momentum, which is a great strategy, but why not layer some fundamental insight in there and say, "Look, Tesla is super high risk. Intel is super low risk." Maybe there's some balance that can be found there. And we think that's part of what the market's going to be doing here through the rest of the year.

KRISTIN MYERS: I want to ask you really quickly about that VP pick Kamala Harris. How much do you see-- markets tend to ignore the elections altogether, but do you at all see an election risk going forward, perhaps any market reaction to the conventions that kick off next week?

DAVID TRAINER: I'm not really that much of a political commentator, so I'm going to beg off on this one. I think you're right. The markets are forward looking. And what the risk-on, risk-off is with respect to the election, I'm really-- I don't know that much. I don't really-- I'm not for sure who the markets are for or not. So, yeah, I'm sorry I can't help you out much there, Kristin.