How to Trade Tesla If You Love to Hate It (Like I Do)
I love to hate the company’s stock.
Earlier this week it hit $498 a share and, in doing so, became worth more than any of the Detroit automakers at any point their history.
Millions of investors are wondering if they should get on board or short the you know what out of it.
The answer comes down to perspective.
Tesla Inc. (NasdaqGS:TSLA) was trading at just $176.99 a share last July but hit a staggering $498.80 per share earlier this week. That’s a jaw dropping 181.85% off its lows! What’s more, that makes Tesla more valuable than Ford Motor Co. (NYSE:F) and General Motors Co. (NYSE:GM) combined.
The shorts – meaning those who bet against Tesla – are going crazy with good reason. Estimates suggest that they may have lost as much as $827 million in the past year alone according to Yahoo!Finance.
They got what they deserve.
Trying to bet against Elon Musk is what’s known euphemistically as a “widow maker” trade because anybody who tries it loses, sooner or later. Some sooner rather than later, but that’s a different story.
I don’t think you should buy Tesla, though.
Tesla is uninvestable. There’s simply no way to apply conventional metrics to get an accurate valuation nor is there any easily discernable path to profits.
Elon Musk remains easily one of the most innovative executives on the planet and totally unpredictable.
To a point I made on the Fox Business Network with anchor Neil Cavuto Wednesday, telling him something is impossible is like sending the man an engraved invitation to try it.
The stock is simply too volatile for the average investor and has undoubtedly given plenty of folks a run for their money. Not mention the need for a little Alka-Seltzer!
Where does it go from here?
Analyst Bill Selesky of Argus research is on record with $556 a share, citing economies of scale and better delivery results in 2020. I think the real story, though, will be China, which remains the largest single consumer market on the planet and a key source of growth.
Personally, I like that the company swung from negative to positive free cash flow recently because that suggests Team Tesla can scale to meet higher expected production and deliveries.
The fact that I don’t like Tesla at $498 share probably means it’ll go to $1,000 tomorrow!
Even so, I’m still not a fan.
My investing approach is based on two things: 1) a clear path to profits; and 2) companies that are changing the world based on flawless execution, savvy management, and stable, protectable margins.
Tesla doesn’t have a clear path to profits and, while it does have a savvy manager – Musk – it lacks flawless execution and protectable margins.
Worse, the same old problems we’ve talked about for years still exist, chief among which are high debt, an unfavorable (but improving) product line up, and a lack of consistent profits. I’d tell you that competition is a serious threat but I think electric vehicles are ahead of themselves as a whole.
Tesla could be a great speculative play, though.
The company’s stock is trading roughly 72% above the company’s 200-day moving average. That’s not just high, but in nose-bleed territory. That tells me more attractive entry points are just ahead.
And, yes, you are correct – that, too, implies I think Tesla will go still higher from here.
Chances are you won’t have to wait long for an entry point.
Musk is a showman.
As such, he is acutely aware that Tesla’s stock price will rise and fall, which is why he’ll do his very best to induce the former every time there’s a hiccup. Even dancing on stage in Shanghai, which is actually just what he did recently.
If you want to play along using speculative capital, consider using a LowBall Order with a price in the $420ish area where the stock encountered both recent support and resistance. Otherwise, you’ll need to go hunting roughly $100 lower in the $320-$330 a share arena to really gain an upside edge.
If you’re options savvy, consider buying a butterfly spread in the same $420 area roughly a month out. That could give you a handsome payoff with comparatively little risk while also allowing you to buy some time at a strike from which Tesla could launch to yet new, higher highs.
The game with Tesla, or any stock like it for that matter, is to pick price points that are so low that others regard them as impossible or unobtainable. This helps keep your risk low while also ensuring you’re not in over your head; the market really has to come to you in order for the trade to really pop.
Which is, of course, what you want.
Until next time,