Tesla (NASDAQ:TSLA) has been one of the hottest stocks of this year, as it rose by more than 55% in January alone. With a strong finish to the year and a second consecutive quarter where it posted a profit, the share price of the automaker took off towards the end of January and, in early February, rose to nearly US$1,000 per share, more than double where the stock ended 2019.
The danger for investors is that the stock has become very volatile, and while it may continue to be at a high price today, it’s never too far from a correction, especially if posts a disappointing result in its next quarterly earnings. The company’s results have lacked consistency in the past, and it’s something that investors shouldn’t overlook, because one hiccup along the way could jeopardize their returns in the auto stock.
The stock trades at a forward price-to-earnings ratio of around 50 and more than 20 times its book value. Even its PEG ratio, which factors in long-term growth, is at 2.5, which is well above the multiple of one that investors typically aim for when looking at growth stocks. As high as Tesla’s stock is soaring today, it may be too much risk for investors to continue holding onto it. And that’s why rather than taking a chance that it has a big drop in value, you may want to buy shares of Great Canadian Gaming (TSX:GC) instead.
The gaming stock has been struggling of late and been oversold as well. While it’s by no means a risk-free investment, it’s arguably a safer investment than Tesla. For one, it has generated profits in each of the past four quarters, and being a service provider, Great Canadian doesn’t face the risk that low production levels will impact its sales. And with solid gross margins that are typically within a range of 65-70%, they are significantly better than the 19-20% that Tesla has topped out at over the past four quarters.
A high gross margin is key for a company to have enough of its sales trickle through and cover its overhead and other expenses. It also ensures that it won’t take a lot of sales growth to improve the company’s bottom line. That’s why being in the service business can be more profitable and safer than selling automobiles. And there’s also the added risk that once the hype dies down and if economic conditions worsen, the demand for high-priced Teslas could decline as well. While fewer people may also go to casinos, it can still be a relatively inexpensive recreational activity for people looking for some entertainment.
Great Canadian trades at only 12 times its earnings over the trailing 12 months and only four times its book value. Its PEG of 1.5 is yet another multiple where the stock compares favourably against Tesla.
Bottom line
Shares of Tesla may continue to soar in 2020, but the danger with jumping on such a hot stock is that sooner or later, it will begin to slow down, and when that happens, there’s a risk that there could be a big correction that takes place. And so while Tesla may still be an exciting stock to buy today, it may not stay that way for long. That’s where investing in a growth stock like Great Canadian that’s also a good value buy may be the better option today.
