Just a few days ago, hedge fund manager David Einhorn posted his third quarter letter to investors in his Greenlight Capital fund, as well as to anyone else who cared to read it. It was a rather scathing indictment of not so much Tesla Inc (NASDAQ:TSLA) the company, but how the market has chosen to value TSLA stock based more on its compelling premise and less on its plausible potential.
His exact words? “Tesla (TSLA) had an awful quarter both in its current results and future prospects. In response, its shares fell almost 6%. We believe it deserved much worse,” though he added a crystal-clear context by explaining:
“Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?”
Fans, followers and others that have made bullish Tesla stock predictions fired back, recycling the argument that Tesla CEO Elon Musk is a visionary and that the bets being made on Tesla now are in anticipation of strong TSLA earnings in the future. Thing is, Einhorn is more or less right. On the other hand, Einhorn’s argument is not the point right now.
The Rules Have Changed
For the record, it’s not just Tesla Einhorn has a problem with. He’s also baffled that Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) shares have managed to dish out big gains on merely mediocre fiscal results. He’s put his money where his mouth is too, holding all three stocks as a short position, meaning he’s expecting them to lose value.
He’s right, by the way. Traders have rationalized some things in recent years they would have struggled to rationalize between 2002 and somewhere around 2006, when the dot-com bubble and its subsequent pop were little more than fading memories. Since then, the investing paradigm has changed. Current value or even plausible future earnings are no longer the basis for a stock’s success. The quality of a company’s underlying story is the key. Ignore the new rules at your own peril.
With that as the backdrop (and as yours truly has said numerous times before), understand that trading Tesla shares is little more than a game of guessing how the market will feel about the TSLA news headlines you know are coming. Such headlines may say that Musk has overpromised, under delivered, made a very cool product, experienced production delays, or needs more money. The only thing that changes is where the stock is at any given time, which helps shape the response to any TSLA news.
And, for better or worse, traders respond rather predictably, and they drop hints of their own changing sentiment on the chart of Tesla stock. They’ve dropped another hint recently on the weekly chart of TSLA.
In short, investors are in the habit of making Tesla shares ebb and flow in a predictable fashion, and it’s just started a bearish ebb. We know this because (1) a double top has been precisely made right around $389, (2) the 100-day moving average line (gray) on the chart below has failed as support after keeping Tesla shares propped up since July’s tumble, and (3) we’ve got a bearish MACD signal. The MACD indicator has been eerily accurate spotting rallies and pullbacks since 2014.
The clincher for the full development of a sizeable pullback will be a cross below the 200-day moving average line (green), currently at $320.
Don’t assume that catalyst will be the one that sends Tesla shares into oblivion though. This is, and Einhorn acknowledged, a market environment that’s using an alternative paradigm to value stocks. The Tesla story itself is likely to buoy the stock again sooner than later, as it has so many times in the past.
Welcome to the new market environment, where not only have the rules have changed, but the rules vary from one stock to the next.
Bottom Line for TSLA Stock
To Einhorn’s credit (and in his defense), he knows the potential trappings of this kind of “anything goes” environment; it doesn’t last forever. Earnings, or at least realistic and plausible earnings potential, will matter again in the future.
He also acknowledged there’s no way of knowing when those standards will matter, commenting:
“…leads to questions regarding whether value investing is a viable strategy. The knee-jerk instinct is to respond that when a proven strategy is so exceedingly out of favor that its viability is questioned, the cycle must be about to turn around. Unfortunately, we lack such clarity. After years of running into the wind, we are left with no sense stronger than, ‘it will turn when it turns.'”
In other words, you have to play the Tesla game until it’s clear the game has changed. Nevertheless, whether you love Tesla stock or hate it, you have to bear in mind the “turn” is likely to happen with little warning.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
