by Anthony Mirhaydari | April 15, 2014 1:28 pm
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[1]); 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[2]), Facebook (FB[3]), Netflix (NFLX[4]), and has spread to other momentum plays such as Tesla stock[5].
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[6]) Leaf or only going halfway in General Motors’ (GM[7]) Chevy Volt. That and the much-vaunted plans for the Gigafactory[8], 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[9] 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[10] over footage of a Model S test drive — much worse for CBS (CBS[11]), 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.
Anthony Mirhaydari is founder of the Edge[12] and Edge Pro[13] investment advisory newsletters, as well as Mirhaydari Capital Management[14], a registered investment advisory firm.
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