TSLA - 7 Investments To Avoid In 2024

2024-01-01 07:00:00 ET

Summary

• As is usual at the start of a new year, many Seeking Alpha contributors have shared their lists of where to put your money during 2024.
• Not losing money with your investments is almost as important as making money.
• In this article, I will present my views on where not to invest in 2024.
• Some picks might be contrarian, some might be bold, and some might sound crazy, but I will try to explain why I believe these investments are likely to underperform in 2024.

First of all, I wish you all the best for 2024!

As is almost an annual tradition, many Seeking Alpha authors dutifully present their lists of stocks for 2024. Growth stocks, dividend stocks, real estate investment trusts, you can find a list of your interests on just about any topic. In this article, I will present my contrarian take on such lists: 7 investments to avoid in 2024.

A short recap

For the last two years, I wrote similar articles about which investments to avoid: 2023 and 2022 . I also compared my predictions with the performance of the S&P 500 ( SP500 ), which you can read here for 2023 and here for 2022 . For each investment that I picked which underperformed the S&P 500, I scored a point. My prediction performance for the previous two years was as follows:

My 2022 performance was excellent, which I mainly attribute to beginner's luck. 2023 was so-so, with some good predictions like Plug Power ( PLUG ) and ZIM Integrated Shipping Services ( ZIM ) which underperformed by a great margin, but also some bad misses like Tesla ( TSLA ) and cruise lines like Carnival Corporation ( CCL ), which more than doubled during 2023.

This year I will try to match or surpass my performance of 2022, although I am fully aware that making these kinds of predictions is in some ways a fool's errand . Prediction outcomes over relatively short periods of time such as only a year will likely be heavily influenced by luck. But this does not prevent me from writing this article, since I still want to try to be right with as many picks as possible. And frankly, making predictions for the new year is a nice activity, these articles are fun to write!

For 2023, I predicted a recession and based most of my picks on this. The recession never arrived, except in some European countries and New Zealand. I still scored a 4 out of 7 this year, and with some picks, I was right for the wrong reasons . Not that good, but I prefer being right for the wrong reasons to being wrong for whatever reason.

2024

In 2024, a recession might arrive or it might not. This year, I will try to choose my picks in a way which makes it irrelevant if we will experience a recession or not. Also, the Federal Reserve is holding steady for now, but the markets seem to expect rate cuts in 2024. Again, I created my picks with the notion that this is irrelevant; I expect my picks to underperform regardless of interest rates.

What do I consider relevant topics on which to base my predictions of what to avoid? Well, investments that are obviously overvalued. Hypes. Irrational pricing. Of course, overvalued assets might become more overvalued, and as the famous economist Keynes said: "markets can stay irrational longer than you can stay solvent".

Two hypes emerged in 2024. The first one is artificial intelligence. We all heard of it, most of us probably used language models like ChatGPT a couple of times for fun and some of us might even use it in a productive way in our jobs already. The second hype is weight loss prescription drugs, also known as semaglutide or GLP-1 . These are represented by the brand names Wegovy, Ozempic, and Rybelsus (by Novo Nordisk ( NVO )) and Mounjaro and Zepbound (by Eli Lilly ( LLY )). These drugs have real potential not only in reducing obesity, but if we should believe certain analysts, they can have all kinds of beneficial societal side effects .

I do not want to understate the importance of AI and semaglutide. At the moment, it does look like these two hypes are going to have real impact soon. In fact, they are already having impact right now, and the financial and societal benefits will likely be tremendous. But we still need to remain critical of such quick movements. Do you remember 3D printing? Cannabis, anyone? Of course, I do not think they can be compared. Also, some things which started as investment hypes have become respected parts of the economy, like cloud computing. Still, AI and semaglutide will have the honor to feature some picks in my list of investments to avoid in 2024, for reasons that I will explain further, the main one being the time scale.

My list

On to the list! Some picks might be contrarian, some might be bold, and some might sound crazy. I might be completely wrong. But without further ado, here it goes:

My list of investments to avoid in 2024.

Drumroll, please!

#1 Eli Lilly

The first one is a bold pick already. Eli Lilly is one of the semaglutide behemoths, and its medications Zepbound and Mounjaro are expected to generate combined levels of sales of over $12B in 2024. This is obviously great news for the company, and the market also draws this conclusion, as we can see when looking at Eli Lilly's share price performance over the last couple of years:

During 2023, Eli Lilly's stock gained almost 60%, and over the last three years, it returned a total of almost 250%. Of course, this should not be a problem since the expected sales mean that Eli Lilly is likely capable of 'growing into' its valuation. But let us take a look at its current valuation:

In the graph above, I showed the normalized and the forward PE ratios, since for companies that are growing quickly, the forward PE ratios can often be a more interesting metric. As we can see, not only the share price of Eli Lilly greatly increased during the last three years, it also became much more expensive.

As a reference: Eli Lilly's peer Novo Nordisk is also expensive with a PE ratio of around 40. But this value is in no way near Eli Lilly's 70-90 (depending on whether you take the normalized or the forward PE ratio). And while I know that Novo Nordisk as a non-US company usually commands a lower valuation than its US peers, this difference is staggering. Maybe expectations for Eli Lilly are higher, as Mounjaro could become the market leader in weight-loss drugs. Also, Eli Lilly's products are about 20% cheaper than Novo Nordisk's.

Still, I do not think that this justifies a PE ratio of double its rival. Also, a PE ratio of 60-90 is simply leaving very little room for error. Even if everything goes according to expectations, I expect Eli Lilly's share price to underperform in 2024 due to its high current valuation.

#2 AI hardware producers ARM and Nvidia

Another case of two companies that rode a wave of optimism during the last year: AI. Arm ( ARM ) went public this year, and achieved the feat of even increasing its already (quite high) price during the rest of the year:

The story of Nvidia ( NVDA ) is well-known: after a pandemic-induced boom in 2021, the stock has a down year in 2022 and is up a staggering 238% during the last year. The growth of Nvidia's earnings made sure that its PE ratio did not skyrocket in line with its share price, as we can see in the graph below:

Nvidia looks less overvalued than ARM, but I expect both companies to underperform in 2024. Yes I know, the market expects staggering growth rates, especially for Nvidia. And I also know that this pick could dramatically backfire. But I believe that the AI hype is ripe for a return back down to earth in 2024.

Of course, AI is already leading to productive results, earnings, and efficiency increases in some industries, but many firms are simply not ready for it. I do not think the potential of AI is overstated, but I do believe that the time scale for AI to become productive in many companies will be much larger than many investors are anticipating right now. I'm getting some minor dotcom flashbacks here, although both situations are not the same. If the market recognizes that AI improvements are going to take longer for most companies to implement, growth expectations for AI hardware producers are bound to drop. I do not know if this will happen in 2024, and for that matter, I do not know if it will happen at all, but I feel we could very well experience a return to the mean for AI in 2024. This would mean underperformance for AI hardware companies, and that is why I am picking ARM and Nvidia as investments to avoid in 2024.

#3 Costco

Retailer Costco ( COST ) has had a wonderful 2023 and can be viewed as somewhat of a darling for buy-and-hold investors on Seeking Alpha. Being mostly a buy-and-hold investor myself, this company never really was on my radar because it almost always seemed too expensive. But this year, this has been taken to a whole next level:

Costco's shares rose by almost 45% in 2023, which is a huge upsurge for a retailer, outperforming the S&P 500 by a big margin. This was spurred on by a recent special dividend of $15.

As you can see, Costco's shares became much more expensive during 2023. The company's forward PE ratio rose from about 32 to more than 42. Not only is this very high for a retailer (Walmart ( WMT ) has about 26, Target ( TGT ) about 18), but it is also quite high in an absolute sense. Much growth has already been priced in, leaving little room for error.

I believe Costco is a wonderful company, but I think the good performance by the company has created unrealistic optimism about the company. The share price has simply got ahead of itself too much. I expect a return to the mean, I would avoid these shares in 2024.

#4 Gold

Gold ( GLD ) has had an ok 2023, after two years during which its price more or less stayed flat. Still, the metal's price is hovering around its all-time high:

Some (mostly technical) analysts are using this historic performance to predict that gold's price is likely to continue rising, and some are even speaking about 'breakout rallies' or that $2600 could become the 'new normal' for gold. This is what I believe:

• Gold's future performance is very difficult to predict, and the usefulness of most technical analysis (including Elliott wave patterns) is correlated with the number of people believing in it, which sometimes creates self-fulfilling prophecies.
• Factors like inflation, interest rates, economic growth, volatility, and uncertainty all have an impact on gold, but it is difficult to measure or estimate by how much.
• Uncertainty (which is very difficult or even impossible to measure) is probably the most impactful metric in the short term, but it is likely unreliable in the long term.
• In the long term, gold will always underperform compared to a diversified basket of stocks of companies that generate real earnings and revenues.

Why do I believe that gold will underperform in 2024 in specific? First of all, uncertainty in the world more or less peaked in 2020 during the pandemic. As you can see in the chart above, gold thrives during these periods, but never really experienced a meaningful drop since then. Also, with interest rates potentially dropping, this could signal a shift of investments from safe havens into slightly more risky assets. Avoid gold in 2024.

#5 Tesla

I am seriously risking sounding like a broken record here, but I decided to include Tesla ( TSLA ) in my list of stocks to avoid for the third time in a row. I know most of the reasons why Tesla is a great company and a promising investment, and I do not wish to give counterarguments to all of them in this article. And yes, I was completely wrong with my prediction about the stock last year.

In the graph above, you can see that since the peak at the start of 2022, Tesla has dropped and experienced some major fluctuations along the way. Still, its PE ratio remains high, very high. Contrary to what some analysts are saying, Tesla still mainly sells cars, its margins have deteriorated and competition is getting more fierce. Also, BYD ( BYDDF ) is even likely to overtake Tesla in 2024 as the world's biggest EV producer.

I believe the graph of the PE ratios of some leading car and EV producers says it all. Even compared to its electric peers, Tesla is simply trading for an inexplicable premium. I think three time is a charm, and even if Tesla could be categorized as a technology company instead of a car producer, its shares are way overvalued. Avoid.

#6 Palantir

Palantir ( PLTR ) has been a volatile stock after going public at the end of 2020. During the last year, its shares rallied by a whopping 168%, although this could also be explained as a return to the mean after two years of bad performance.

As you can see, Palantir's forward PE ratio is not as high as it was during the entirety of 2021 until 2023, but it is still dangerously high, at a value of almost 70.

Palantir has been announced by some as being the 'AI-king', and although the company has some real potential by integrating artificial intelligence into its software platforms, a large part of its revenue is from being a government contractor. Having never used its software, I am not able to estimate to which extent AI presents opportunities for Palantir and its customers, but viewing Palantir's core strengths (machine learning and data analysis), it seems very likely that Palantir could be a company reaping the benefits of AI. Still, as I said above in my part about ARM and Nvidia, I believe the deployment of AI in many industries will take much more time than most investors are currently anticipating.

Palantir is still priced to perfection, and the stock is currently heavily influenced by the positive market sentiment surrounding artificial intelligence. If anything happens that will influence these expectations for the worse, this will affect Palantir's stock. Avoid Palantir in 2024.

#7 Plug Power

Having already written about Plug Power ( PLUG ) a couple of times, its inclusion in my list of stocks to avoid should not be a surprise. Even without looking at its share price performance or any ratios, a company with margins this poor (minus 69% and possibly deteriorating) is very likely going to be a bad investment. And yes, I know that Plug's share price has already dropped like a rock during the last couple of years:

I believe that the company is facing an existential crisis . It is burning through so much cash that it likely needs to raise money during the next couple of months. If the company does not succeed in getting a major loan by the Department of Energy, it probably needs to raise cash by strongly diluting its shares. This is likely to lead to an even further drop in its share price. And even if Plug succeeds in getting the loan of the DOE, this doesn't stop the cash burn and does not decrease the time period the company needs in order to become profitable. Plug needs to repair its margins but it seems more and more likely that time is running out. Avoid Plug Power in 2024.

Wrap-up

So, there you have it, my predictions of stocks and investments that I believe will underperform in 2024:

I think that some of these are wonderful investments that I would gladly own as a buy-and-hold investor, there is not too much real 'trash' on my list this year. But as I explained, I expect all of these to underperform in 2024.

I promise to review these predictions at the end of this year again and compare them to the performance of the S&P 500 Index ( SP500 ) to see whether I was right or wrong. Until then, please tell me in the comment section whether you agree or disagree with my selection for this year!

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