How I learned to stop worrying and love not owning Tesla

It was January 2024 when we launched the Mergence Global Quant Equity Portfolio and, looking back, it’s hard to believe it’s been only 17 months. At that time, the Magnificent Seven stocks still looked magnificent, S&P 500 valuations were stretched, the war in Ukraine had intensified, and the US had just vetoed another UN Security Council resolution for a ceasefire in Gaza.

While much has shifted since then, some things remain familiar: the US has now vetoed a fifth consecutive ceasefire resolution, the Russia-Ukraine war continues, and stock valuations in the US still appear lofty. Among the loftiest remains Tesla, a stock whose erratic price movement mirrors the unpredictable behaviour of its CEO, Elon Musk.

In fact Tesla, which arguably revolutionised the car manufacturing sector, has become the most contentious of the Magnificent Seven stocks and consistently trails its peers on measures of value and quality. Through our quantitative lens, the picture is clear: sagging fundamentals, declining profitability, and volatile price action. In this regard, Tesla increasingly resembles viral stocks like GameStop and AMC Theatres – strong on hype, weak on substance.

So, what is this quantitative lens we apply? It’s a data-driven way of analysing a large universe of stocks – more than 1,300 companies across 23 developed economies. These quantitative strategies are based on empirically tested factors like value, quality and sentiment to find the best investment opportunities. These factors help us systematically assess and rank stocks relative to the broader market.

As shown in the chart below, Tesla persistently ranks poorly across all three key factors. Since the fund’s inception, we have either held no position or are deliberately underweight the stock. Tesla currently ranks at number 1,229 of the 1,325 stocks we monitor – one of the lowest-rated stocks in our global investment universe.

While the concept of reasonably efficient markets is well understood in the field of finance and by readers of The Wisdom of Crowds, by American journalist James Surowiecki, it is often forgotten that a “wise crowd” relies on its members making decisions largely independently of each other. Today’s social media platforms have the tendency to turn “wise crowds” into co-ordinated mobs.

The volatile price movements of Tesla, despite its weakening fundamentals, should therefore come as no surprise. Markets have become less efficient, with price action driven more by noise than by underlying value.

In less efficient markets, investors must be prepared to weather more volatility and periods of discomfort, and stay focused on long-term outcomes. At Mergence, our systematic global equity process helps us cut through the noise and remain anchored to facts. Keeping sight of the bigger picture remains essential.

Fazila Manjoo is a portfolio manager at Mergence Investment Managers.

_{Top image: Strangelove: Vecteezy/Chanaka Dilshan. Illustration: Rawpixel/Currency collage.}