Tesla, Inc (NASDAQ:TSLA) has been on one hell of a tear. Shares raced higher by more than 3% in afternoon trading Monday, as TSLA stock hit a new all-time high of $313.73. Tesla stock is now up 28% over the past month and up 46% in 2017.
So what the heck are investors supposed to do?
Tesla stock’s rapid run has put almost all investors in a tough spot. On the one hand, it’s too dangerous to sell-short the stock and bet on its demise. Buying it after this type of run though seems dangerous in itself. Those who have been long may not want to sell even though the rally is stretched.
Let Me Short TSLA Stock
Every rationale investor wants to short this darn stock. It’s been rapidly rising on the hope and merits that TSLA will change the world. Its valuation is ridiculously insane, trading at 130 times 2018 earnings estimates. Of course, that’s predicated on the company even generating a profit, which is far from a guarantee.
But here’s the problem with betting against Tesla stock based on valuation. It applied 28% ago and 46% ago. It applied at the start of the year, last year and three years ago. That’s the whole problem. TSLA is one of the market’s few stocks that doesn’t trade on valuation, so there’s no reason to short it based on those merits!
One day the shorts will be right. Tesla stock will pullback 10%. It will fall 20%. At some point, it will likely fall by 40% or more. But we don’t know when that point will come. And because TSLA stock is disconnected from valuation, we can’t use that as a basis for our decision making.
Plus, who wants to short a stock with a 38% short interest? First, it’s harder to borrow. Second, a short covering rally can be mentally and financially taxing and come at any point. The hype remains strong too. Case in point, one analyst just slapped a $368 price target on TSLA. Simply put, shorting Tesla stock is a gamble and gambling is not investing.
So, Let Me Buy Tesla Stock?
Ironically, the only thing that might be more dangerous than shorting Tesla stock is buying it. Valuation based on earnings is pretty nuts, but it’s similar for sales, trading at 7.3x last year’s results. On the plus side, analysts expect sales to grow 64% in 2017.
CEO Elon Musk, knowingly or not, is selling the future to investors. It’s not a slight to Musk — who I really like — but it’s just the case. Tesla has passed both Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) in market cap. Is Tesla more valuable than these companies, the ones that churn out billions in profit each year? Of course not. But temporarily, it is in the stock market.
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Why? Because of the future.
Some investors are betting that Tesla is the company — not just the automaker — of the future. TSLA has got solar shingles, Powerwall energy storage solutions, all-electric cars and more. Aside from just cars, investors are betting that Tesla can revolutionize the energy space too.
Of course, it doesn’t hurt that TSLA is gearing up to produce the Model 3, its mass-produced sedan. Its Model Y rumors and solid Q1 deliveries results fueled the belief that Tesla can change the auto game.
Then there’s the momentum buyers. They are buying solely because TSLA stock has been rocketing higher. They’re squeezing shorts and riding the buying wave. Given its near-50% return so far this year, it’s remarkably difficult to justify buying Tesla stock. For non-impulsive investors, this is definitely one to avoid for now.
Bottom Line
Unfortunately, TSLA stock is one for the spectators. It’s way too dangerous to short, because there’s no telling when the rally will end. Conversely, the rally could end tomorrow, and therefore buying is dangerous too.
For investors who want to buy Tesla stock, patience is key. Waiting for the positive news to blow over will be tough, because there will be a lot of it. Model 3 production talk, cars of the future; the list goes on and on. But once that news blows over or doubts materialize over production, Tesla stock could tumble.
Anything could drive it lower when the time finally comes. It might not even be stock-specific. TSLA could take a tumble if the broader market pulls back too. For those looking to get long, investors could buy at the 50-day, 100-day or 200-day moving average at $265, $238 and $224, respectively.
Of course, investors could buy anywhere in between those levels, too.
Bret Kenwell is the manager and author of Future Blue Chips. He can be contacted on Twitter via @BretKenwell. As of this writing, he did not hold a position in any of the aforementioned securities.
