The last two days haven’t been enjoyable ones for investors of Tesla Motors (TSLA). In fact, they’ve been downright miserable. Tesla stock has fallen 8% from Monday’s peak, and now that the ball is rolling in the wrong direction, investors are understandably fearful that much of the remaining 43% gain achieved since the end of March is now in jeopardy.
The prod for the pullback from Tesla stock was back-to-back downgrades on Tuesday and Wednesday. Specifically, Deutsche Bank lowered its opinion on TSLA on Tuesday, while Pacific Crest cut its rating on Tesla stock today.
While alarming on the surface, a closer look at the rationales behind the downgrades is merited. As it turns out, this isn’t a company-performance issue. This is a stock-disconnect issue.
Tesla Stock Isn’t Tesla the Company
Most of the time, a company’s stock is an approximate reflection of that company’s underlying value, adjusted for its plausible future earnings. Every now and again, though, the story and hype surrounding the company hijacks a stock, which then takes on a life of its own … life breathed into it by speculators are understand the premise more so than they care about profitability.
Amazon.com (AMZN) is one such example. It’s rarely profitable, and when it is, margins are paper-thin. That hasn’t prevented investors from bidding AMZN up more than 1,000% over the past 10 years, however, and that’s simply because the company is growing.
Tesla is another one of those story stocks that has spent most of lifetime being pushed around by hope and speculation rather than results.
That’s not necessarily a bad thing. It’s just a reality. And it’s a reality that can set up a setback like the one that materialized this week for Tesla stock.
The bark is worse than the bite, though.
Take a closer look at the assessment of Tesla from Deutsche Bank’s Rod Lache that accompanied Tuesday’s downgrade:
“We’ve been bullish on Tesla’s prospects, based on the company’s electric vehicle opportunity … (and) we believe Tesla could become a dominant player. But at this point, Tesla’s shares appear to already reflect this opportunity.”
Pacific Crest’s Brad Erickson noted with his firm’s downgrade of TSLA:
“Sentiment has reversed; 2H bar looks high. Sentiment has reversed dramatically since six months ago. Now there is less concern about low oil prices, less fear about competition, less skepticism around opportunities in China and less worry about demand. We also believe optimism around Model X has risen meaningfully heading into a likely September launch. … We are lowering our 2015 and 2016 estimates. Our reduced expectations are driven by expectations for less accrued leasing revenue partially offset by higher battery revenue.”
These aren’t exactly scathing indictments. Indeed, they’re not pointed at the company at all. They’re pointed at the disconnect between Tesla stock and the company given the company’s well-understood and highly transparent results and outlook.
The downgrades were simply back to “holds,” and interestingly, while Deutsche Bank downgraded the stock, it also upped its Tesla stock price target from $240 to $285.
Bottom Line for TSLA
So if TSLA moves in a manner that has little to do with actual fundamentals and more to do with relative perception (e.g. “downgrades are bad and therefore I must sell today”), how does one play it?
It’s not a popular premise, but this is a case where even tried-and-true buy-and-hold investors have to watch charts to determine where the turning points are developing.
As it stands right now, TSLA has dished out a key reversal signal for the week by virtue of a move to a low under last week’s low. That move has also carried Tesla stock below the semi-important 20-day moving average line that played something of a support role last month.
In other words, whether merited by the fundamentals or not, the Tesla stock price is sinking mostly just because traders expect it to sink.
As for where TSLA might find a floor and reverse, that’s a bit trickier.
Tesla Motors undoubtedly has more going for it now than it ever has. Aside from record-breaking delivery levels during its second quarter, the rumored delivery of the Model X crossover vehicle as early as September has already created a well-deserved buzz.
Barring some sort of unexpected earnings catastrophe in the meantime, any pullback should be fairly short-lived, and a floor should be found relatively nearby. That puts the convergence of the 100- and 200-day moving average lines around $228 in focus as a first, best hope for a floor.
If for some reason the $228 area doesn’t hold as a floor, the next best bet is the low of $181 hit in March. As it stands right now, though, the odds of Tesla stock needing to burn off that much froth are low. A revisit of the $228 mark (if that) should more than do the trick.
It’s not a concern fundamentally driven investors usually have, but TSLA isn’t a fundamentally driven stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
