However, many investors are worried that the red-hot momentum of Tesla stock is running out of gas. TSLA is down about 20% from an all-time high above $291 per share at the beginning of September, and continues to show signs of weakness.
So should investors sell TSLA stock, or should they hang on to this iconic electric vehicle company in hopes of a turnaround for shares — perhaps driven by Tesla earnings in November?
Unfortunately, there are some serious short-term headwinds for Tesla stock that hint at continued pain for the rest of October.
TSLA Takes a Hit
The latest dings for Tesla stock both have the fingerprints of Big Auto on them.
For starters, Michigan signed into law an effective ban on Tesla this week that dictates automakers must sell through franchised dealers. Since TSLA stock relies on (and Elon Musk insists on) direct sales, the electric vehicle company can’t operate showrooms in the state and record sales there.
This isn’t the first time Tesla has run into trouble on the direct sales front. Earlier this year, New Jersey banned direct sales by automakers to join a handful of other states.
It’s not a death knell, of course, because Tesla has managed to do just fine in regards to growing its 2014 EV sales — and up until October, TSLA stock was going strong as well. However, if this ban of direct sales becomes a trend, it certainly could create a headwind for the electric vehicle company.
The move by Michigan is pretty conspicuous given the pull of Big Auto in the state. Just consider the “Big Three” automakers — that’s General Motors (GM), Ford (F) and Fiat Chrysler (FCAU) — have much of their operations in Michigan, and it’s hard to imagine they didn’t play a role in this law. Major automakers still want to tap into the lucrative EV market, via alternatives like the Chevy Volt from GM or the Fusion plug-in from Ford.
The fact that the German auto giant behind the Mercedes brand sold out of Tesla stock is telling. In fact, Daimler at one time owned 9% of the EV company and has now exited it altogether, saying direct ownership “is not necessary for our partnership and cooperation.”
What’s Next for Tesla Stock?
Investors will have to read into this what they will. The bottom line is that Michigan seems to be protecting its own, sticking up for GM and Ford, and Daimler apparently believes it is better to take the money and run than continue to depend on Tesla stock rising.
Now, these items could just be noise. After all, the Federal Trade Commission weighed in earlier this year and seemed to side with Tesla in regards to the benefits of direct sales to consumers and the need to allow the EV maker to do business this way.
Furthermore, there are no guarantees that Daimler is making the right move by selling — as evidenced by Yahoo (YHOO) selling out of part of its Alibaba (BABA) stake back in 2012 to fund a host of weird acquisitions, among other things. Or heck, consider that Daimler sold more than half of its original stake before 2014 — at obviously much lower prices, considering the meteoric rise of TSLA stock. Companies, like all investors, don’t have a crystal ball and can’t predict the right time to sell with 100% accuracy.
But the bottom line is that the big sale by Daimler and the bad press about dealer bans has come at a pretty weak time for Tesla stock, and could create a bit of a drag on shares for the rest of October.
If you want to be aggressive, consider buying on a dip in advance of November earnings. Tesla stock could go on a tear if numbers impress — and a look at the history of this stock shows that short squeezes after earnings are not that uncommon.
However, remember that if earnings miss, this negative sentiment is only going to get worse … and it could result in a sharp drop for TSLA stock.
There could be some fireworks for Tesla in 2015 as the Model X SUV hits the market and the company continues to forge ahead with its Gigafactory battery plant … but honestly, sentiment rules the day for TSLA stock, so it pays not to think too far down the road on this momentum player.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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