When the bear comes calling   Recently updated


It’s been years since we’ve had a proper stock market crash.

And while that doesn’t necessarily mean that you should be looking for stocks to sell because a crash is imminent, in my view, now’s not a bad time to think about which companies face the biggest risks.

In a bear market, the weakest companies with the flimsiest business models are the ones to get hit the hardest.

 

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Vicious Cycle

This is particularly true of corporations that need regular cash infusions from secondary stock offerings.

A falling stock price raises the cost of capital, and becomes something of a vicious cycle.

Stock declines force greater shareholder dilution as the company issues more shares to bring in a fixed amount of capital.

 

Bear Attack

In my opinion, it might be time to think about which stocks are at risk from a bear-market mauling.

I do not think you necessarily have to scramble to dump them immediately, of course; some might even be decent short-term trades.

Just don’t get attached. Once the market eventually rolls over, these companies will likely be some of the hardest hit. And you don’t want to be left holding that bag.

 

Tesla Motors

I really hate including Tesla Motors (TSLA) on this list because I admire founder Elon Musk and I really like his product.

The world will be a better and greener place for Mr. Musk’s efforts.

But, for the reasons below, I wouldn’t touch the stock with a 10-foot pole.

 

EV Edge

Tesla operates in a hypercompetitive industry, and has no enduring competitive advantage in producing electric cars.

Virtually every major automaker either already has or is developing a high-end electric car to compete with Tesla.

Earlier this year, for instance, Volvo announced that in 2019 all of its new cars will be either electric or hybrid.

 

Takeaway

This follows an announcement by Porsche to do the same inside of 10 years. And even mass-market Volkswagen AG (VLKAY) plans to make at least 25% of its cars hybrid or electric.

These are established players that have been around for decades. Tesla is still an upstart that has yet to turn a profit.

Despite growing its revenue at an impressive clip, Tesla has never come close to earning a profit. And there is no light at the end of the tunnel here; profit projections are murky at best.

Investors will continue to feed Tesla capital… right until they don’t.

You don’t want to own Tesla stock when that day comes.

Photo Credit: SteFou! via Flickr Creative Commons

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Charles Sizemore
Charles Sizemore
Sizemore Capital Management LLC is a registered investment advisory firm located in Dallas, Texas. Charles Lewis Sizemore, CFA is the founder and Chief Investment Officer of the firm.