J.P. Morgan analysts Stephen Tusa and Ryan Brinkman each made a bold, bearish call on a stock they cover—General Electric and Tesla, respectively. And while they have largely stuck with those views for years, the calls have played out very differently, especially in 2020.
The difference in the paths of these two analysts’ recommendations illustrates a lot about Wall Street stock-picking, as well as the often nuanced factors that can tank one stock and send another soaring.
Stephen Tusa covers industrial companies at J.P. Morgan. He cut his rating on General Electric (ticker: GE ) stock to Underweight—the equivalent of Sell—from Hold in April 2019, taking his price target to Street low of $5 a share. The move made some waves: At the time, GE stock traded around $10 a share, and the average analyst price target was about $16.
Tusa, however, has been bearish on the stock for more than four years—citing declining cash flows and high debt, among other factors—and hasn’t rated it a Buy since 2013. When he first went to Sell-rated in May 2016, he was the only bear, with 11 other analysts rating GE a Buy. The average analyst price target was $32, and GE shares were roughly at $28—Tusa’s target was just under $26. He kept cutting as the stock dropped, and the call ended up looking quite prescient.
Since his initial Sell rating in May 2016, GE shares have lost investors about 18% a year on average. The S&P 500 has returned about 15% a year on average over the same span.
Meanwhile, Tusa’s colleague at the bank, Ryan Brinkman, covers car stocks. He rates Tesla stock (TSLA) Sell, and has a target price of only $90 a share—roughly 85% below where Tesla stock is trading.
Brinkman has covered Tesla since 2012, originally rating shares Hold. He went to Sell in 2015—then a bold call, too, with only one other Sell rating on the Street—and has stayed there ever since. Tesla was trading around $40 a share at the time, and the average analyst price target was roughly $53 a share. Brinkman believes that Tesla can’t trade like a tech stock forever when it, essentially, makes cars.
Since the 2015 Sell call, Tesla stock has returned about 59% a year on average—it has been hard to be a bear. But as Tesla stock marches higher, Brinkman has gotten some company. Now 13 analysts rate Tesla shares the equivalent of Sell.
On the surface, the GE call has worked and the Telsa call hasn’t. Both analysts know their industries and both do careful financial models. Why does one look so right and another so wrong? There are a few reasons.
Timing
Timing is a big factor. With any stock call, it all depends on when you look.
As recently as June 2019, Brinkman’s Sell rating looked like the sagacious one, as Tesla stock was below his price target. The call was solid for almost 1,600 days. Then Tesla added roughly $570 billion in market capitalization over the past 550 days. It has been an incredibly rapid rise.
Tusa, for his part, remains relatively bearish on GE. He shifted to a Hold rating for GE stock in March, and doesn’t have a price target, though has written recently that the value of the stock could be under $5. But CEO Larry Culp’s arrival in late 2018 has provided investors with a new bull thesis, focusing on simplifying operations and reducing debt. GE stock got back above $13 a share before getting floored by Covid-19. Despite the pandemic, shares have clawed their way back above $11.
It can be hard for analysts, as well as investors, to identify inflection points.
Investor Types and Broken Promises
Another part of the story is the kinds of investors that different stocks appeal to.
Long ago, GE was a staple holding of all fund managers. But in 2016, when Tusa turned bearish, one of GE’s key businesses was starting a slow decline. The coal-fired power generation business was losing market share to gas-fired generating capacity, as well as renewable power generation. In addition, GE ‘s power unit had recently wrapped up a large acquisition—part of Alstom (ALO.France)—effectively doubling down on what was becoming a very challenged business.
The basic tenets of the GE investment case were breaking down: Earnings estimates were becoming harder to hit and asset write-downs started to occur. As a result, GE lost its core, large-cap, value-oriented investor base. They sold shares, and the stock didn’t bottom until the end of 2018.
Tesla, meanwhile, has been able to hold on to its growth-focused investors. CEO Elon Musk, in 2014, laid out a very broad and aggressive vision: “If you take [2013] revenue, around $6 billion or thereabouts, and if we are able to maintain a 30% growth rate for 10 years, add to your 10% profitability number, and have a 20 PE [ratio], our market cap would basically be the same as Apple’s is today.” That math implied a $700 billion market value.
Tesla margins aren’t 10% yet. But six years in, Musk has managed grow sales at about 31% a year on average. Growth investors have no reason to give up on their original Tesla investment thesis.
The Science of Stock Ratings
The nature of analyst ratings is another piece of the puzzle. Brinkman rates Tesla Underweight, and Tusa now rates GE Neutral, the equivalent of Hold. Barron’s, and others, group Street ratings into Buys, Sells, and Holds. (Some investors say there are really only two ratings: Buy and Don’t Buy.)
But for J.P. Morgan, an Underweight rating means institutional investors should hold less of a stock than their benchmark does—it doesn’t necessarily mean they shouldn’t own any of the shares or that they should bet against them. Investing pros running funds are often judged by how they did against a benchmark, such as the S&P 500. That is an added nuance to ratings that can sometimes be lost in summaries.
For instance, despite Brinkman’s perceived bearishness, he still values Tesla at about $90 billion, which would leave Tesla as the third most valuable car company globally, behind only Volkswagen (VOW.Germany) and Toyota Motor (TM). Tesla’s market capitalization, at Thursday’s closing price, is about $584 billion. Toyota stock is worth $234 billion, and Volkswagen stock is valued at about $93 billion.
Looking ahead, GE continues to push toward a turnaround, and Tesla’s valuation keeps soaring, possibly unsustainably so. With a little more time, the perceived outcome of these two stock calls could look very different.
Write to Al Root at [email protected]
