For the first time since the fiscal cliff caused a mini-panic on Wall Street way back in December 2012, the easy, low-volatility rise we’ve enjoyed is under threat. That’s especially the case for high-fliers like Tesla Motors (TSLA); Tesla stock is down nearly 6% right now, yet another day of pain for the electric-vehicle maker.
It’s all coming apart now as big tech and biotech fall from the sky, wings scorched like Icarus after flying too close to the sun. Already, many one-time momentum favorites are in outright bear markets, down more than 20% from their highs. The list includes Amazon (AMZN), Facebook (FB), Netflix (NFLX), and has spread to other momentum plays such as Tesla stock.
TSLA, led by wunderkind CEO Elon Musk, is down nearly 30% from its late February peak and is diving toward its 200-day moving average — a level that Tesla stock hasn’t breached since September 2012.
Excitement in Tesla stock has been driven by hopes of a more affordable, entry-level model (the Model E) that will bring the sex appeal and eco-credentials to the mainstream — making it cool to juice up on the mains instead of being goofy in the Nissan (NSANY) Leaf or only going halfway in General Motors’ (GM) Chevy Volt. That and the much-vaunted plans for the Gigafactory, the jumbo-sized battery factory that Tesla estimates by 2020 will exceed 2013 global battery production.
TSLA shares even hit a peak of $265 back in February — up a whopping 684% in just one year.
But things have changed.
I recommended shorting Tesla stock to my Edge Letter clients back in October and November. It could be an attractive short-side candidate again if the 200-day MA doesn’t hold near $170 a share.
That’s because beyond the technical and the market-wide pressure hitting Tesla stock, there are some negative headlines weighing on sentiment as well.
Tesla Motors is battling a lawsuit filed under Wisconsin’s lemon law in which a customer is requesting the company buy back his defective vehicle. TSLA is reportedly set to receive lower zero-emission green credits in California for each Model S vehicle sold. That’s a problem, since the company uses these credits to pad its revenue by selling them to other, traditional manufacturers.
Even a favorable recent 60 Minutes segment on Musk and Tesla was marred by a mini-scandal over the dubbing of gas engine noises over footage of a Model S test drive — much worse for CBS (CBS), but still, it shined the spotlight in the wrong place.
While the company’s long-term prospects are bright, the short-term pressure should continue to build after investors pushed TSLA’s stock price too far too fast, stretching valuations and pushing the trailing 12-month price-to-earnings ratio to a lofty 340. Even on forward 12-month projected earnings, Tesla stock still trades at an 111x multiple.
If TSLA can get down to $170 or below, forward multiples would drop back down to double digits and a buying opportunity could present itself.
But right now, it’s time to sit back, sell if you must, and watch the speculative excesses flame-out of Tesla stock.