“Apple Founder Calls Elon Musk a Liar… Buy this $10 EV Company Instead”

by Travis Johnson, Stock Gumshoe | February 6, 2018 4:17 pm

"This tiny $10 company has half of Tesla’s market cap and is profitable, to boot."
What's Christian DeHaemer pitching as a better alternative to Tesla?

Christian DeHaemer[1] is pushing an ad recently that focuses on a Tesla alternative, and his latest free email touted the appeal of buying it after this latest market shakeup. So what’s the story?

The ad is for his Bubble and Bust Report, which sounds like an entry-level monthly stock picking newsletter ($49/year, compared to his Crisis and Opportunity[2] letter at $1,599/yr), and the big bait is that report about his “Tesla Killer: Best EV Company to Own Now” … so let’s sift through the clues, feed ’em to the Mighty, Mighty Thinkolator, and see what comes out the other end.

His basic argument is that his favorite electric vehicle (EV) company is profitable, while Tesla is a money-sucking capital-heavy Elon Musk[3] ego project (my paraphrasing, not his words). Here’s what he notes in the introductory email:

“I want my EV company to make money and concentrate on producing and selling vehicles. There is one that perhaps you’ve never heard of. It is an expert battery[4] maker and has produced more phone batteries than anyone in the world. It has also sold more electric vehicles than anyone, including more than 51,215 in December alone.

“And due to a new five-year plan in China[5], it is expected to grow 10 times by 2025.
If that’s not enough to entice you, then you should know that you can buy this company at a 13% discount.”

OK then… so what other clues do we get? After a rundown of some of the background stats that you’re probably already familiar with, the various long-range plans and regulatory goals of different countries that are pushing us toward rapid adoption of electric vehicles over the next 10-25 years (UK and France plan to ban gas vehicle sales by 2040, China wants 70% of cars to be hybrids or electrics by 2025, etc.), he gets into the specifics of the company he’s teasing…

“Around 20 years ago, a peasant farmer had nothing more than a dream. He knew that he could make something revolutionary, something that could literally change the world. In a beaten down farmhouse, he worked on inventing a new battery…

“Little did he know that this single invention would transform him from a small-town peasant in China into a verifiable billionaire….

“In 1995…. He started what would become the world’s BIGGEST mobile phone battery-maker. He made the lightest, most powerful battery on the planet….

“This man’s innovation in lithium[6]-ion batteries is what now enables those devices to last for days on a single charge….

“… our inventor has gone from building the world’s most successful battery company to forming what will be the world’s most successful car company…”

So that’s probably enough clues for quite a few of you… and we’re also told about the record of profitability his company has shown over the past several years (in contrast to Tesla’s continuous loss-making reports).

And in case you need just a wee bit more in the way of clues, we get the biggie…

“Warren Buffett[7], the Oracle of Omaha — one of the greatest investors of all time — is even a major investor in this company!

“And he NEVER buys outside the U.S. But for this company, he did.”

Well that’s just silly — Buffett invests and buys outside the US and has for decades, and in fact has often talked about trying to locate more international investments. None of Berkshire’s publicly traded foreign investments are huge right now, with the exception of a good-sized position in Sanofi, but he has invested outside the US plenty of times, including owning a big chunk of the UK’s Tesco for a while, and has bought entire companies overseas as well (including a UK electric utility, a large Israeli metalworking company, and a german motorcycle accessories firm). You won’t see all of his publicly-traded foreign investments in Berkshire’s 13F[8] filings, of course, since the SEC requires only that US-listed equity investments are included in those reports, but the foreign investments are still there — as are the foreign companies that are not counted as “investments” but are subsidiaries of Berkshire Hathaway.

But anyway, yes, most of Berkshire’s business is in the US, and most of their big investments are US-focused… and, yes, they did invest in this little battery maker back in 2009 — this is, of course, BYD (1211 in Hong Kong, BYDDF or BYDDY OTC in the US).

BYD got a huge amount of attention when Buffett bought about 10% of the company back in the Fall of 2008, in the midst of the financial crisis — though it was actually Charlie Munger[9], Buffett’s partner, who owned shares and brought BYD to Berkshire’s attention, mostly because of his admiration for BYD’s founder and CEO Wang Chuan-Fu, who Munger referred to as a combination of Jack Welch[10] and Thomas Edison. It has certainly worked out well, that position has I think gotten slightly eroded by subsequent share sales, so I don’t think they own quite 10% anymore (more like 8%, I believe), but that $230 million investment is now worth something in the neighborhood of $1.3 billion. That doesn’t make it a particularly critical investment for Berkshire, and I haven’t heard Buffett talk about it much of late, but it has been both lauded and controversial from time to time over the years.

BYD has also come up a few time in the pages of Gumshoe, though not a lot recently — our friend David Mazor[11], who writes about Berkshire subsidiaries and investments, has been interested in them recently[12] mostly because of the huge numbers of orders they’re getting for electric buses, and a few newsletters have touted the stock since Berkshire got on board (the most recent push I covered was from Nicholas Vardy[13] about 18 months ago)… and it’s a common refrain among investing pundits that BYD is a “Tesla clone” that looks more appealing than Musk’s Tesla, mostly because BYD makes money and has that home field advantage in the Chinese market, where electrification of the automobile fleet (and pollution reduction) is a priority of the government.

BYD is more appealing to me than Tesla, though I’ve never owned either directly… and I’m fine with letting Warren Buffett manage my exposure to BYD at this point, though I can see the appeal of a battery and electric vehicle company that has been consistently profitable for a decade. The financials look fairly reasonable, though it is certainly not a consistent growth company — they had a big year in 2016, but the past four quarters have been pretty flat compared to the year-ago period… at least partially, it appears, because of changing subsidy policies for electric cars in China (and there have been more changes for 2018, with subsidies focusing on longer-range and more powerful electric vehicles — I don’t know whether that puts BYD under pressure compared to competitors like Chery, BAIC or Geely).

Of course, the financials look dramatically better than Tesla’s financials… but the story is far less sexy because the cars are less dramatic and they don’t have the visionary Elon Musk at the helm (BYD makes mostly compact cars that compete with pretty similar products from other Chinese companies, and is less than half the size of Tesla…. and unlike Tesla it doesn’t carry any net debt, but it has sales that are about 50% higher, and better gross margins).

If you presented me with spreadsheets that detail these two companies, including the revenue, sales, profits, size of their home market and the slate of products they offer, I’d choose BYD over Tesla without having to even think about it very hard… but that doesn’t mean the stock will do better, of course, just that it’s fundamentally a much more appealing business because it makes money from a fairly diverse product offering and has a strong trend behind its basic business (batteries and electric cars).

What BYD does not have, at least in the minds of shareholders at this point, is the unique Musk-driven brand or growth daydreams of Tesla — and those daydreams are worth a lot to some investors (and might even come true, if Tesla’s Model 3 production starts to get a lot lot lot better), so there’s certainly no guarantee that BYD stock will outperform Tesla stock… even if I’d be more comfortable owning BYD. BYD has outperformed Tesla over the past year, and over the past three years as Tesla has stalled a little bit, but Tesla’s absurd fun in 2013 makes their long-term stock chart look far more fantastic than BYD’s.

And what about that “13% discount” that DeHaemer mentions? Is there some way to buy BYD shares at a cheaper price? I don’t know what he means by that, but I suspect that he’s referring to the fact that trading in BYD shares is sometimes relatively discounted in either Hong Kong or in the US, depending on sentiment on any given day. Right now, the two markets are not showing a 13% difference — though sometimes they do. BYD closed at 1211 in Hong Kong last night at HK$67.15, which is US$8.59. So BYDDY, which is a 2:1 ADR (represents two HK shares) should be at $17.18 and instead opened at $17.58… and BYDDF, which is a 1:1 OTC ticker, should have been at $8.59 but opened at $8.74.

That’s not unusual for stocks that trade in two different markets, the valuation often shifts between markets by a few percent, and occasionally the gap becomes more dramatic, especially when volume is relatively low, so if you’re interested in tracking that precisely and making a hobby of it, yes, you can probably get a discount — usually the “discount” would be in buying the shares at the fair price in Hong Kong, where most of the volume is, but sometimes, as when the markets wash out and everyone’s panicking, it might be cheaper in the US… the two markets are never open at the same time, so you’re doing some guessing either way.

Right now, Bloomberg[14] estimates give BYD a forward PE of about 25, and the 15%+ expected growth rate means they have a PEG ratio of about 1.6… which is right in the middle of “reasonable” in my book, and far cheaper than most electric car companies (or growing Chinese companies, for that matter). So there’s no clear red flag in those basic financials, though if you dig in you might find other warning signs in your research into their future prospects… if so, please let us know with a comment below.

P.S. About that “Apple founder calls Musk a liar” bit, DeHaemer didn’t go into that any further in the ad for some reason, that was just his attention-getting headline, but yes, Steve Wozniak did reportedly say some skeptical things about Tesla [15]at a recent conference (and has shared similar public misgivings about Musk’s promises in the past, though he says he loves and drives the cars). That Musk has a tendency to overpromise shouldn’t be a surprise to anyone, let alone investors who have learned to take Musk’s promises about the pace of Tesla’s advances or the rate of their production with, at the very least, a grain of salt.

Disclosure: I own Apple and Berkshire Hathaway shares in my Real Money Portfolio[16]. I do not own any other stock mentioned above, and will not trade in any covered stocks for at least three days per Stock Gumshoe’s trading rules.

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