$7 a share: “Discover the Profit Power of This ‘Tesla Clone'”

What's being pitched by Alpha Investor Letter?

By Travis Johnson, Stock Gumshoe, November 8, 2016

Today we’ve got a pitch from Nicholas Vardy’s Alpha Investor Letter, and it is blissfully not about the election at all.

Let’s all just breathe a sign of relief, “ahhhhhhhhh.” Soon, one hopes, every day will be like this moment.

Here’s what caught my eye about this “personal invitation” from Nicholas Vardy:

“Discover the Profit Power of This ‘Tesla Clone’

“Shares of this $7-a-share company could rise 60% in the months ahead. The next leg up has already begun… up 7% since the August 29, 2016, earnings report.”

OK, that sounds interesting. I have never been able to convince myself to buy Tesla shares, given the always absurd valuation… but electric cars are certainly part of a growing market, maybe there’s a company otu there that’s actually making money at it? Let’s see what Vardy is really talking about…

“… there’s one small company – roughly half the size of TSLA – beating Elon Musk and his team at their own game.

“This ‘Tesla Clone’ is doing everything Tesla does – except it’s doing it faster, sooner and bigger than Tesla itself….

“Shares of this “Tesla Clone” are already eating TSLA for lunch – gaining five times more than Tesla over the past 12 months….

“Sales and profits are UP for the ‘Tesla Clone’. In 2015, sales jumped more than three times – from 20,000 to 62,000 electric vehicles. This year, it’s on pace to sell more than 150,000 plug-in vehicles… and could top 1 million cars sold by 2020….”

And, well, that’s about it for our clues… but, thanks to the incredible power of the Mighty, Mighty Thinkolator, it’s enough. This is almost certainly the Chinese electric vehicle company BYD (1211 in Hong Kong, BYDDF or BYDDY OTC in the US — BYDDF is 1:1, BYDDY is the 1:2 ADR, both trade in similar volume)

BYD started life as a maker of lithium ion batteries for cell phones, and it’s been a pretty well documented company thanks to the charisma of its founder and the substantial investment that Berkshire Hathaway made into BYD about eight years ago. That was during the first frisson of modern electric car excitement (the first Tesla roadster also hit the road in 2008), and the stock soared for a little while — mostly, really, because of the novelty of Warren Buffett effectively endorsing a pretty small Chinese growth company… though it was Buffett’s colleague Charlie Munger who really advocated buying this particular stake and introduced Warren to BYD’s founder Wang Chuan-Fu. It was a cool story, it hit Fortune Magazine at the time, and it was hot stuff for a little while before falling back to earth early in 2010 and had a couple weak years (Charlie Munger stood by them, for whatever that’s worth).

More recently, BYD has been refreshingly boring. They have continued to sell cars, and have made inroads into electric buses and utility trucks, and they certainly sell more electric vehicles (and at much lower prices) than Tesla. They also sold a stake to Samsung Electronics last year, so Berkshire’s share of BYD has been reduced to about 8% (which makes it a very small position for Berkshire, worth roughly $1.5 billion… not enough to get any attention in Berkshire’s annual reports).

It’s not a small company, the market cap is about US$20 billion now, but it is profitable and has been growing both revenue and earnings over the past year — and the valuation does not look too bad, at least on the surface, with a trailing PE of about 25, a price/sales ratio of 1, and a 1% dividend.

I have not looked into the company’s financials in any detail, but the basics are pretty well-presented by the FT here. The webpage for their North American business is here if you’re interested. They continue to have a subsidiary, BYD Electronic, which makes components for cell phones and other small electronics.

If you’re looking for other articles about what BYD is up to, there’s a piece about their models and 2015 sales here, and a story about their last earnings report here (the report was in August, and the stock was up afterward for a little while, as teased… but it is now below where it was when they reported). Our friend David Mazor, who writes about Berkshire Hathaway and its subsidiaries, also has a special report on BYD here and has been particula