Apple and Tesla Stock Splits. Should I Invest Now? Investors Ask Natalie.
What do you think about Apple and Tesla splitting their stocks? Is now a good time to buy?
Tempted to Buy
Dear Tempted, but Questioning:
Good for you to ask the question, rather than just assume that you should buy. I’m not sure what is so alluring about penny stocks and stock splits, but many investors are tempted to shoot from the hip on these events. Doing that is more like investing in Hertz after it declared bankruptcy just because it’s cheap (a losing proposition), or buying one of the new Tesla competitors before they have any sales (with the exception of China’s Nio, which increased sales 147% year over year in the most recent quarter).
So, what is a stock split? It’s just a way for a company to make its stock cheaper, so more people can buy it. It would be like a pizzeria that sells giant slices for $8/each, deciding to cut that slice into 4 pieces and sell each piece for $2/each. Does that mean that the pizzeria will sell more slices or that your smaller slice is better than the larger slice? Nope. It’s actually the same thing. Whether you buy 4 small slices for $8 or one large slice for $8, it’s the same amount of pizza. So, you’re back to looking at the Stock Report Card to determine whether or not you should invest in Tesla and Apple, rather than thinking a stock split is a good reason to buy or sell.
I just did a blog on Tesla, so read that blog for additional information on whether or not Tesla is a good buy right now. Tesla is trading at 247 times its forward earnings. The historical average price/earnings ratio is in the 16-17 range.
Apple’s price/earnings ratio is also outlandish, at 40. So, if you buy right now, it is the equivalent of paying $15 for an avocado. Apple’s sales were $260 billion with $55 billion in net income last year. However, the company is likely overvalued at $2.15 trillion. You’re buying very high if you purchase Apple right now. Remember that successful investing does require buying low and selling high.
In addition to looking at the company itself, you also need to consider the following 3 questions.
What Can the Industry Do?
With regard to autos (even electric vehicles), auto sales typically tank in recessions. Tesla’s 2nd quarter sales were down -4% in the last quarter. It would be a pretty big surprise if the 3rd quarter sales were higher than 2019. As with many companies, Tesla is not providing guidance on what the next quarter will look like. Tesla’s electric vehicles are the hottest trend in auto sales. However, fewer people are willing to take on a car payment when they are afraid of losing their job. There is also $14.27 trillion in consumer debt weighing down the American wallet, of which $1.34 trillion is auto loan debt.
So far the delinquencies are low, at 2.26%. However, that could be artificial, based upon general moratoria that have been put in place. As you can see in the chart below, debt is higher than it was before the Great Recession. So is the unemployment rate. That's a formula for big problems. Things are in an artificial lull right now, but that doesn't mean that we're out of the woods yet.
Technology has been resilient. Apple’s sales were up 11% in the most recent quarter. If the company brings in the same revenue in the next quarter, then sales will be down -7% year over year. If there are any supply chain disruptions, or if sales are not as robust as they were, then the drop will be more noteworthy. Although technology is hot, and Work and Educate from Home trends require everyone to own a PC and a smart phone or tablet, it is possible that this need has already been satisfied. Also, the $1200/person stimulus paycheck helped folks to purchase in the last quarter. That free money hasn’t materialized yet in this quarter.
What Will the General Market Do?
We are in an unprecedented recession. Stocks have recovered because the Federal Reserve bought up almost everything to prevent a collapse. There will continue to be defaults and bankruptcies, particularly in those industries that have been hardest hit by the pandemic, including retail, small businesses, oil, hospitality, travel, commercial real estate, malls, casinos, live entertainment, cruise ships and more. As you can see in the chart below, bankruptcies are quite elevated.
As Howard Silverblatt, the senior index analyst of the S&P500 ® said on July 31, 2020, this market rally has been built on “fear of losing out by individuals, the need to make the numbers by money managers, and the universal need to believe... As for doomsayers and (shocked) short-sellers, eventually they will be right, but when?”
In short, today is actually a 2nd chance for most people to get it right by rebalancing and making sure that they have enough safe. For those of you who rue that you didn’t have Apple or Tesla before these major rallies, then you need to learn more about our pie chart system, which allows you to own up to four hot slices. If you have clean energy or technology in your portfolio, now is a great time to rebalance and capture gains. Additionally, what’s hot and what’s safe changes every year. So, consider whether or not you think that Tesla will continue to be this hot going forward when deciding how much to keep in your portfolio.
August 28, 2020, for shareholders as of August 24, 2020, for Apple. 4 for 1.
August 31, 2020, for shareholders as of August 21, 2020, for Tesla. 5 for 1.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She blogs on Huffington Post and Medium, and is a frequent guest contributor to national news shows and magazines. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.