Is Telsa In The Auto Industry?

The standard method of determining what industry a company is in is by looking at its underlying business. By that standard, Tesla is clearly in the auto business.  Virtually all of the company’s revenues and costs are related to building, selling, and servicing automobiles.  But there is another way of checking whether a company is an industry that has implications for investors.  The idea is that if two companies are in the same industry, then their stock prices should tend to move together.  For example, when the Covid-19 crisis arose, the stocks of all major airlines collapsed together. This raises the question of whether using this second criterion Tesla is in the auto industry. Before turning to the results, a couple caveats are in order.


The Stock Market Is A Tide

First, all stocks tend to move together. The overall market can be thought of as a tide which raises and lowers all boats. Furthermore, during sharp declines and times of crisis, stocks move together even more closely. During the market decline from mid-February through the end of March, 498 of the 500 stocks in the S&P 500 dropped. The subsequent recovery was similar with all 500 stocks in the index posting a gain the month after the March low. Therefore, when looking at correlations between the returns on individual stocks, the impact of the market should be netted. There are a number of sophisticated ways to do this, but the simple method of simply subtracting the market return from the company’s return is a good approximation and I use it here.


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"Surreal doesn't even begin to describe this moment," Seth Klarman noted in his second-quarter letter to the Baupost Group investors. Commenting on the market developments over the past six months, the value investor stated that events, which would typically occur over an extended time frame, had been compressed into just a few months. He noted Read More.

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