Stanphyl Capital commentary for the month ended January 31, 2025.
Friends and Fellow Investors:
For January 2025 and year-to-date the fund was up approximately 0.7% net of all fees and expenses. By way of comparison, the S&P 500 was up 2.8% and the Russell 2000 was up 2.6%. Since inception on June 1, 2011 the fund is up approximately 25.6% net while the S&P 500 is up 482.2% and the Russell 2000 is up 225.3%. Since inception the fund has compounded at approximately 1.7% net annually vs. 13.8% for the S&P 500 and 9.0% for the Russell 2000. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends. Investors will receive exact performance figures from the outside administrator within a week or two. Please note that individual partners’ returns will vary in accordance with their high-water marks.)
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This month’s modest gain was due to an increase in the value of our Volkswagen long position, partially offset by an increase in the S&P 500 and some “whipsawing” in the price of Tesla (despite a horrendous earnings report that should have instantly dropped it 30%--more on that later), both of which we’re short.
I dedicated the opening sections of our last two monthly letters to long mea culpas regarding this fund’s awful performance in 2023 and 2024, and by reminding you of that here my intent is to fully reiterate that without requiring you to read it yet again. Instead, I shall discuss why I think we’re positioned to recapture this fund’s high-water mark and beyond…
We remain short the S&P 500 via various ETFs. According to Standard & Poor’s, Q4 2024 S&P 500 operating earnings came in at around $61.16 (their most recent estimate, dated January 23), which is $244.64 annualized. (As more companies report, this number will likely come down as late-reporters tend to do worse than early-reporters.) The S&P 500 is currently selling for around 25x those annualized run-rate operating earnings, yet the traditional “rule of 20” (which says that its PE ratio should be 20 minus the current 2.9% rate of CPI inflation) would put a 17.1x multiple on them, thus bringing that index down to just 4183 vs. the current 6041, a drop of over 30%. And, of course, Trump’s tariffs are a wild card, and probably not a winning one!
Although the job market (a trailing economic indicator) is certainly stronger than I anticipated it would be by now, I wonder how much of the recent hiring was due to anticipation of a better economy under Trump that—because of tariffs, persistent high interest rates and less fiscal stimulus—won’t actually arrive. Indeed, “economic complacency” is rampant, as in the latest BofA survey 50% of fund managers expect a 2025 “soft landing,” 38% expect no landing, and only 5% expect a recession. And yet public company insiders are dumping shares at a record pace.
As evidenced a bit further down in this letter, the consumer is finally beginning to crack, yet stock buyers believe that no matter what happens with the economy they can confidently “buy the dips” because “the Fed has their backs.” Yet the Fed can’t prevent a bear market in a recession when stocks start from this extreme level of valuation…
…and when the U.S has a stock market this highly valued relative to the rest of the world…
…and when investors are this (over)allocated to stocks:
…and when the stock market is this disconnected from the real economy…
And complacency isn’t just limited to stocks—corporate debt is “enjoying” it too…
As noted earlier, the U.S. consumer is cracking in this consumer-driven economy. The most recent real (inflation-adjusted) year-over-year retail sales comps (December sales reported in January) were up just 1% vs. December 2023, and scores of retailers (and FedEx and UPS, which deliver for them) recently posted results that reflect a tough business environment. Target, Macy’s, The Gap, Ross Stores, McDonald’s, Sherwin Williams, Nordstrom, Dollar General and Foot Locker all recently reported negative real (inflation-adjusted) same-store sales comps and guided to negative real comps going forward, while Lowes, Home Depot, Nike, Kohl’s, Best Buy and Williams-Sonoma comps were negative in both real and nominal terms. Wal-Mart did recently report U.S. same-store sales that outstripped inflation by 2.7% (although it guided to a lower figure going forward), but that modest gain is likely due to middle-class consumers leaving pricier retailers. And in addition to retail sales, there are plenty of other signs that we’re due for a hard landing…
…and I expect that sticky inflation (currently year-over-year 3.2% core CPI and 2.8% core PCE even before Trump starts imposing inflationary tariffs) will prevent the Fed from cutting enough to prevent one.
We continue to be long Volkswagen AG (via its VWAPY ADR, which represent “preference shares” that are identical to “ordinary” shares except they lack voting rights and thus sell at a discount). Under CEO Oliver Blume, VW is doing all the right things to position itself for the future, including a tough cost-cutting agreement with its union, a joint venture obtaining access to Rivian’s excellent EV software (here’s a good explanation of the rationale behind that) and JVs in China with Xpeng and SAIC. VW currently sells for less than 4x its 2025 earnings estimate while controlling a massive number of terrific brands including separately listed Porsche, of which it owns 75% at a current market cap (for Porsche) of €56 billion and Traton, of which it owns 89.7% at a current market cap (for Traton) of €15 billion, thus making VW’s €42 billion Porsche stake and €13.5 billion Traton stake combined worth around €5.5 billion more than the entire €50 billion market cap of VW. In other words, at current prices you’re getting paid €5.5 billion to own all these brands:
I believe that on a sum-of-the-parts analysis Volkswagen is worth around €140 billion, which would be nearly $30 per VWAPY ADR vs. January’s closing price of just $10.10. Additionally, the stock currently yields around 9% (although that might be reduced as a result of the recent union negotiations), and VW has a wide range of electric cars available and in development (including one for €20,000) as demand (or regulatory requirements) for them develops, as well as a revamped China strategy and even a battery energy storage business and a robotaxi.
We remain short Tesla, which in January reported a decline in 2024 vehicle deliveries and earnings vs. 2023 (and, for that matter, lower earnings than in 2022)!
TSLA closed January at a price of $404.60/share, giving this declining-earnings & revenue car company (only 10% of its 2024 revenue came from energy storage) a PE ratio of approximately 178, and that’s before Trump kills demand for its cars and emission credits. As for the value of its so-called “Full Self Driving” (discussed in detail several paragraphs below):
Following Trump’s November win Tesla’s stock ran up over 90%, fueled by massive waves of call option buying despite the aforementioned fact that Trump will kill the $7500 EV tax credit and reduce the fleet emissions standards that generate GHG credits that make up a large portion of Tesla’s diminishing profits (and the UK and the EU will likely reduce that credit revenue too). These actions are not “good for Tesla” despite the desperate claims of Wall Street shills that they are—the same shills, by the way, who applauded all those credits on behalf of Tesla when they were created. This isn’t rocket science: if it suddenly costs $7500 more to buy a Tesla, Tesla will sell many fewer cars. And if competitors don’t need to meet higher CO2 emission standards, Tesla will sell them many fewer credits and the competition can sell many more profitable ICE cars instead of EVs. While the Trump-Musk “bromance” (while it lasts) may be good for SpaceX and Musk personally, Trump’s policies are indisputably bad for Tesla.
Auto companies comparable to Tesla sell for only around 4x to 6x earnings, which would make its stock worth only around $11/share vs. January’s insane closing price of $404.60. No wonder Musk is trying to nonsensically claim that Tesla is “really a robot, robotaxi and AI company!”
In 2019 Musk claimed that the hardware in then-current Teslas (and every subsequent Tesla) would soon receive software to make them hugely profitable "robotaxis.” As far back as January 2016 he claimed that every new Tesla had all the hardware needed to be completely self-driving and would receive the necessary software by 2018, and he “demonstrated” this with a completely fraudulent promotional video. Meanwhile, here we are in 2025 and Tesla’s “autonomy” system has been linked to hundreds of crashes and dozens of deaths, and in December 2024 the Head of Autopilot Hardware Engineering left the company. Lawsuits against this product continue to pile up, and it may be a basis for millions of people to sue Tesla for hundreds of billions of dollars (more on that below), while negatively impacting Tesla’s current and future sales via publicity that has turned its so-called “Autopilot” and “Full Self Driving” into laughingstocks. In 2022 Musk said that without self-driving, Tesla stock is basically worthless and in July 2024’s Q2 conference call he said “I recommend anyone who doesn't believe that Tesla would solve vehicle autonomy should not hold Tesla stock.” Needless to say, I agree with him!
In October 2024 Musk showed a non-functional, impractically low-slung two-seat robotaxi “prototype” via an extremely slow, carefully pre-mapped, human-monitored “demonstration” in a closed off movie studio lot. (He also showed a bunch of deceptively remote-controlled “humanoid robots” without telling attendees they were remote controlled.) Safe robotaxis (already available from multiple competitors in both the U.S. and China, as are humanoid robots more advanced than Tesla’s) need LiDAR and radar sensors, yet if Tesla adopts LiDAR it may face the most massive lawsuit in history, as it will have sold over six million LiDAR-less cars claiming they had all the hardware needed to be autonomous, and thus anyone can claim “future autonomy” is the sole reason they spent $40,000 to $100,000 to buy their Tesla, and then sue for a refund. Meanwhile, in the Q4 earnings call Musk admitted that Tesla already needs to upgrade the so-called HW3 computers in millions of cars (the latest computer is HW4), a multibillion dollar expense in itself. Of equal importance is that Tesla’s autonomy software remains absolutely awful, with one independent lab reporting that it required a critical intervention every 13 miles—meaning that as a “robotaxi” it would crash multiple times per hour! Additionally, several competitors in China already offer similar products and some of them even offer it for free! And here’s an excellent dissection of Musk’s nonsensical claim that the far superior, years ahead service of Waymo, which in October 2024 did a financing round valuing itself at $45 billion (less than $13 per TSLA share) “can’t scale,” while also in October the NHTSA opened yet another safety investigation into this deadly product (which—like all U.S. federal government Tesla investigations—I expect to go nowhere now that Musk’s new pal Trump is in control of the agency).
In 2023 Tesla’s most-recent CFO suddenly quit (or was fired) on no notice, the latest in a series of sudden and unexplained Tesla CFO departures, and in August 2024 the VP of Finance left. This may be tied into reported DOJ criminal investigations (which I expect Trump to abandon) of Musk regarding “autonomy fraud,” additional Musk-directed consumer fraud regarding the range of Tesla’s cars, his alleged attempted theft of company assets to build himself a house, and a massive & systemic Tesla safety cover-up while people continue to die in (or because of) Teslas at an astounding pace. (In fact, Teslas crash more than any other brand of car and have the highest fatal accident rate by brand.)
Now let’s put these massive safety deceptions and cover-ups into context: as bad as Tesla’s public financials are lately, how much worse might they be “in reality”? I mean, why would anyone trust financial statements from a guy who’s been caught lying and covering-up deadly safety defects multiple times over the years and cycles through CFOs the way McDonald’s cycles through Gen Z fast-food workers?
Meanwhile, Tesla is now opening its U.S. charging stations to cars from all other manufacturers which, in turn, will adopt Tesla’s connector and charging protocol. (Those competitors are building their own networks, too.) Seeing as many people only bought a Tesla instead of a competing EV in order to access those chargers, and seeing as all the competing charging networks will also adopt this protocol while paying Tesla nothing (Tesla open-sourced it), this will cost Tesla far more in lost auto sale profits than the pennies per share it may gain from charging profits.
And Tesla has objectively lost its “product edge,” with many competing cars now offering better real-world range, better interiors, faster charging speeds and much better quality. In fact, Tesla ranks third from the bottom in both JD Power's initial quality survey and Consumer Reports’ used car reliability survey, and its Model 3 is the worst car (out of 111!) in Germany’s rigid safety inspection system!
And oh, the fraudulently promoted and multiple-recalled Tesla “Cybertruck” won’t be much of a “growth engine” either, as demand has already collapsed despite extremely limited production.
Another favorite Tesla hype story has been built around so-called “proprietary battery technology.” In fact though, Tesla has nothing proprietary there—it buys the vast majority of its cells from Panasonic, CATL and LG, while the “4680s” it’s trying to make itself are a manufacturing disaster with no meaningful advantage in energy density and, as noted in that linked article, even if Tesla does wind up successfully making its own 4680s, other manufacturers will gladly make and sell them to anyone.
As for Tesla’s “AI” hype story, the top leaders of that team left the company in October 2024, and also in 2024 Musk raised $12 billion for a competing AI company he controls!
Meanwhile, despite promises to the contrary, Musk seemingly spends far more time on Twitter and in Washington D.C. than he does at Tesla.
Mark Spiegel
