Fund Managers Underweight Tesla Are Boosting Their Performances

Shares of Tesla (TSLA) fell more than -5% Thursday to a 1-week low and are modestly above a 5-1/2 month posted late last month.  After rallying to a 13-month high in July, shares of Tesla have ratcheted lower on increasing headwinds for the company. The recent underperformance of Tesla has prompted many fund managers to avoid the stock to improve returns.

Active fund managers invest in the largest megacap technology stocks to boost their returns. In October, more than two-thirds of U.S. mutual funds with a bias toward bigger market capitalizations outperformed the Russell 1000 Stock Index, the third straight month of beats.  With Tesla falling 20% in October, the fund managers that were underweight Tesla outperformed their peers.  In comparison, Alphabet (GOOGL) declined -5.2%, and Apple (AAPL) lost -0.3% last month.  Bank of America said “funds” bias toward large stocks within the Russell 1000 and being underweight in Tesla boosted performance.

This year, the top seven megacap technology stocks have led most of the equity gains in the overall market. These seven megacap stocks compromised over 90% of the S&P 500 Index’s ($SPX) (SPY) 14% advance this year.  However, the performance of some of these stocks has diverged, prompting investors to focus more closely on individual company metrics and away from the moves higher of the overall megacap technology stocks. Tesla’s elevated valuation is also concerning to some investors, as the company trades at 57 times forward earnings, significantly higher than that of its other megacap counterparts. 

Headwinds for Tesla increased after CEO Musk dialed back growth expectations for the company last month, citing rising interest rates that have undercut consumer spending and demand for its vehicles.  Although shares of Tesla are up +70% this year, analysts have been cutting their earnings estimates for the company.  According to Bloomberg data, analysts, on average, now expect Tesla’s 2024 earnings to be about 40% lower than what they were estimating 12 months ago.  Also, Tesla’s share of bullish analyst ratings is at the lowest in more than 2-1/2 years, reflecting growing skepticism of the company’s outlook.

Some analysts are concerned about how long Tesla will take to overcome its recent setbacks.  Morgan Stanley believes Tesla’s ability to grow its earnings and address new markets within its core electric vehicle business and elsewhere is necessary for the stock to rebound from its recent losses, saying, “We believe investors will show a willingness to believe in the long-term profit potential of the company but are unlikely to take further downward revisions in earnings and free cash flow forecasts without cramming down the multiple.” 

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