Over the weekend, Elon Musk, CEO of Tesla (TSLA), took to his social media platform, X, to recommend that Warren Buffett's Berkshire Hathaway (BRK.A, BRK.B) consider buying Tesla stock. However, despite Musk's suggestion, experts believe Tesla doesn't align with the investment philosophy Berkshire Hathaway has historically followed.
Buffett's "Formula" for Stock Selection
A 2017 study in the Financial Analysts Journal, titled "Buffett's Alpha," identified key characteristics Buffett prioritizes in his investments. These "cheap, safe, quality stocks" typically boast:
- Low price-to-book ratios: This indicates a company's stock price is undervalued compared to its net assets.
- Low betas: Beta measures a stock's volatility relative to the overall market. A low beta suggests lower risk.
- High dividend-payout ratios: Companies with high dividend payouts offer investors a steady stream of income.
- High growth rates of profits: Consistent profit growth signifies a company's potential for future success.
Tesla Doesn't Fit the Mold
While Tesla exhibits impressive profit growth over the past five years, it falls short on the other three criteria:
- High Price-to-Book Ratio: Tesla's ratio is among the highest in the S&P 1500 index, indicating a potentially overvalued stock.
- High Beta: Tesla's beta suggests higher risk compared to most stocks.
- No Dividend Payouts: Tesla currently doesn't offer any dividend payouts.
Buffett's Focus on Value and Stability
Buffett's famous quote, "We only swing at pitches we like," further highlights his preference for well-established companies with strong fundamentals and stable cash flows. Tesla, with its high valuation and growth-focused approach, seems like a different kind of swing altogether.
Supporting Evidence:
The performance of two funds designed to mimic Buffett's criteria – AQR Large Cap Defensive Style Fund (AUEIX) and iShares Edge MSCI USA Quality Factor ETF (QUAL) – closely mirrors Berkshire Hathaway's returns. This consistency strengthens the argument that Tesla wouldn't be a typical investment for Buffett.
Looking Ahead
While the possibility of a Berkshire Hathaway investment in Tesla can't be entirely ruled out, it appears highly unlikely given Tesla's current financial profile and Buffett's established investment philosophy.