What the heck is going on with Tesla (Nasdaq: TSLA)?
That’s a question I’ve been asking myself nearly every day recently. The first thing I do before I start my pre-dawn morning workout is to see where the stock traded.
It’s not normal.
Stocks often move 20% randomly throughout a year. Often times, there’s no rhyme or reason. It’s just the ebb and flow of the market and changes in sentiment. The moves might have nothing to do with fundamentals.
Tesla is different.
Tesla is a controversial company. By sheer dollar value, the stock is the most heavily shorted in the market. With that much money being bet against it, investors should expect a wild ride.
And a wild ride it has been.
On Tuesday I mentioned that Apple, Inc. (Nasdaq: AAPL) is an “A” rated stock in my Forensic Accounting Stock Tracker (FAST) software. “A” rated stocks have substantially outperformed the market since I created the program in 2009. Apple scores well even after doubling off its low.
The same cannot be said for Tesla.
It now ranks as an “F.” Historically, “F” ranked stocks have barley eked out a gain since 2009. Of course, anything can happen with any given stock. Tesla has been a superstar in 2020.
Part of the move is the tug of war between bullish and bearish investors. When target prices for the stock came out in the range of $800 to $15,000 per share, it was off to the races. Shorts scrambled to cover some of their bet. They got caught with their pants down.
As far as fundamentals, there are reasons to be concerned about the company.
For example, the Tesla earns massive credits from zero emission vehicles which it can then sell to other companies that are less environmentally friendly. That’s not high-quality revenue.
There’s also reason that at $750 a share, Tesla could be undervalued. For example, demand for batteries is outstripping supply. And there is a strong movement toward environmentally conscious investing. Funds in this space have seen massive inflows. As of December, 2019, these funds manage over $500 billion, up six-fold in four years.
There has been some real buying in the move up. Volume has exploded and given the amount of capital required to push the stock up as much as it’s rallied, I doubt it’s all the work of computers.
But what’s obvious to me is that the stock needs to cool off a bit. Pull up a weekly chart. It’s easy to see that it was creating a base for a couple of years. Then Tesla got a bit weak and started to break down. It looked ready to implode. Then some good news in terms of fundamentals and some aggressive price targets cause it to reverse course and skyrocket.
Despite that, the price action on the most recent weekly bar is bearish. The stock is up. Huge. But it’s left behind a huge “tail” from nearly $1,000 to $790. Tons of selling there. It’s time for a pause.
What could cause Tesla’s stock to not only justify its current price, but shoot up from here? Profitability. Sustain profitability. That will cause the stock to be added to the S&P 500. At $130 billion + in market value, Tesla will rank highly based on market capitalization.
Then index funds and other large money managers will have to buy the stock. Tens of billions of dollars will chase the stock.
We are not there yet. The stock needs a breather. It is way overbought.
Therefore, I think the path of least resistance from here is down a bit. At least until it creates a base again from which to launch another assault on $1,000 per share.
For now, buyer beware.