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Beware of these cult stocks: Chanos

Talking Numbers

Jim Chanos says Tesla and Netflix have become cult stocks. Should you deprogram your portfolio of these highflyers or is he wrong?

Famed short-seller Jim Chanos, manager of the $6 billion Kynikos hedge fund, says there are two wildly popular stocks that are priced well beyond what the fundamentals call for. For Chanos, they’re less about being stocks and more about being cults.

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Speaking at a Wall Street Journal event on Monday, Chanos said:

“The problem with companies like Tesla and others like Netflix … is that they have gone beyond an interesting product … to becoming cult stocks, to becoming sort of investments or speculations despite the fundamentals.”

Chanos then went on to recount how an analyst’s report on Tesla released Monday raised its price target using discounted cash flows. When one of Chanos’ own analysts reviewed the report, he noticed that only about 5% of the valuation came from anticipated cash flows for the next seven years. The remaining 95% came from speculated cash flows in 2020 and after.

According to Chanos, such conjecture comes as analysts try to justify current stock prices even though fundamentals cannot.

Tesla’s stock has more than quintupled in 2013. At $22.4 billion, the company is worth nearly half the value of General Motors though it sells the equivalent of 0.002% of GM’s annual revenues. Neftlix has also had a banner year; it nearly quadrupled over the past nine months. Netflix is worth $18.6 billion, about four times as much as Cablevision, but has revenues a little more than half that of Cablevision.

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So, is it time to deprogram your portfolio of these stocks or is one of these a good investment?

CNBC contributor Gina Sanchez, founder of Chantico Global, looks at the fundamentals and singles out Tesla as a buy. She believes Tesla is different than its larger rivals like GM or Ford.

“Quite frankly, Tesla isn’t most auto manufacturers,” says Sanchez. Investors are “If you look at battery electric vehicles sales for 2013, it’s up 208%. So, you could argue as a first-mover in a growing industry, they should command a much higher price.”

The charts say otherwise, according to Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson. Once a Tesla bull, he’s recently changed his position.

“I’m quite bearish on the name up here just like Mr. Chanos,” says Ross. “Tesla: it’s faster than a Porsche, safer than a Volvo, and better-looking than Kate Upton. But that’s just a story that’s been working.”

“I supported this stock but sometimes, you have to leave the party before the lights come on,” says Ross. “I think the technicals are starting to show the cracks in the armor.”

Watch the video above to see what the fundamentals and technicals have to say about Tesla and Netflix.

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