There is no doubt that Tesla’s (NASDAQ:TSLA) cars grab attention on Main Street. However, the fringe of its stock fans are more finicky. They fall in and out of love with Tesla stock rather quickly. Case in point? Two days ago, everyone loved TSLA and then management reported earnings. They missed one mark by a small margin, yet the stock fell 10% from high to low into Thursday.
For today’s write-up, I’m not about to say this stock is a bargain. Nor am I here to give the green light to go all in on this dip. Instead, my goal is to convey just how silly it is to sell TSLA stock for an earnings miss. The company grew its top line by 46%! Tesla is clearly a growth company and that doesn’t come easy or cheap. It takes miracles to bring in billions in sales without a dealer network or advertising.
Hopefully, I can also convey the fact that there are rarely perfect entry points for everyone at once. They do come around sometimes, like when Apple (NASDAQ:AAPL) or Boeing (NYSE:BA) fell under $90. But this isn’t one of those times.
Finally, I also want to warn investors that catching falling knives that have risen too fast can cost you digits. TSLA stock has rallied over 1000% since March and that was not a normal price action. Pundits justify it for several reasons, the main one being the chase of Tesla’s induction into the S&P 500. Last year, there was also the mania of buying stock splits and it did five-to-one in August. But regardless of reasons, the buying that brought about this incredible rally was too ferocious.
Tesla Stock and the Headline Wrinkle from Robinhood
This makes for a precarious situation on the charts. On the other hand, though, it would still be unwise to short TSLA. Many have tried — and failed miserably over the years. And shorting momentum stocks like this has recently gone wild.
For instance, this new Robinhood investment mentality has hogged the headlines for two weeks. Right now, what’s happening in GameStop (NYSE:GME), AMC (NYSE:AMC) and Nokia (NYSE:NOK) is mind-boggling. GME stock rallied over 2200% in 10 days. NOK stock spiked from $4 and change to almost $10 practically overnight, then quickly gave it all back up. And the theater isn’t over yet. There seems to be a three-way battle going on. Two Wall Street hedge funds and a Reddit investment group called Wall Street Bets (WSB) are causing the ruckus.
It’s so outrageous that Robinhood banned the weapons in this fight. Now, politicians are getting in on the wildness as Robinhood is facing a class-action lawsuit claiming some sort of discrimination. I mention this all because Tesla could get wrapped up in it, too — and without warning. Because of these market skirmishes, the risk of shenanigans remains high for the next two weeks.
Meanwhile, investors can strategize and ascertain the proper levels to own, add or stop out of Tesla stock. Contrary to what its mega-fans might believe, waiting for a better entry point is not dissing it. Sometimes traders need to realize they’ve missed a move and try to catch the next one.
TSLA Has Several Layers of Support
There are several levels of support on the Tesla stock chart.
The first level of short-term support is above $794. If this fails then there will be buyers at $755 and $696. If I own shares already and the correction comes, I’d consider adding some under $700. I don’t believe it falls below that all on its own. But if the market trips, it could drag TSLA with it. The November breakout from $500 per share was very strong. That’s because the stock spent almost three months consolidating the range. This built a strong base where it’d make sense to significantly add shares for the long-term.
Fundamentally, TSLA has never been cheap but it doesn’t have to be. Before its Model S hit the streets, all prior electric vehicle (EV) efforts had failed. They were goofy-looking and people simply rejected them. Now everyone covets an EV. Just yesterday, General Motors (NYSE:GM) announced that it will be cutting its production of gas-powered vehicles in the next 14 years. That’s astonishing news and confirmation that the market has chosen its next mode of transportation.
Now, the onus is on Tesla to continue its growth rate and so far it has been incredible. There were touch-and-go moments, but in the end CEO Elon Musk pulled it off. Not too long ago, the experts were sure that Tesla was as good as dead. However, this year it has a better balance sheet than most if not all major legacy automakers. Clearly, TSLA is doing something right. Investors who still insist on it being cheap before they buy it are mistaken. Think about it: if Amazon (NASDAQ:AMZN) had listened to the critics about spending less in its earlier years, we would not have had the cloud.
Growth companies cannot accomplish their incredible feats without squandering a few bucks. As such — as long as the execution is delivering tangible results — pundits should give the company a pass on profitability. So what if Tesla missed on earnings estimates. It delivered 61% more vehicles over last year.
I’ve also read complaints about the company’s ambiguous forward commitments. If you’ve listened to Musk in his previous presentations, his answers on goals often sound made-up. It’s almost as if he gives himself the challenge right there on the spot. But that’s not a bad thing — as long as he continues to move heaven and Earth to try and get there.
He doesn’t get them all right, like the time he estimated having 1 million autonomous taxis on the road by now. But that’s not his bread and butter and he is looking for extra streams of income. This out-of-the-box thinking is part of the bullish thesis for Tesla stock. Its cars segment is only chapter one.
Work Around the Unease
The timing of when to buy or sell depends entirely on the time frame of each individual person. Unfortunately, there isn’t a one best answer that fits all. But when I am uneasy about buying a good stock, I use options. There I can build a buffer between current price and my level of risk.
For example, I can collect $9 today for selling the February $700 put contract. By that, I commit to purchase Tesla stock for 15% lower than the current price. This trade does not need a rally to produce profits. In fact, the stock can fall to $685 before it starts causing me harm. If I were to invest in TSLA, that buffer would give me peace of mind knowing I don’t have to be perfect with my timing.
But the biggest fear I have these days comes from the state of the indices. The whole market is too high, given the current economic conditions. Things are awful — otherwise the government would not be spending an extra $2 trillion in stimulus. That is an astronomically big number. The leaders are freaked out. In contrast, Wall Street is having a party like never before. In my opinion, this will end badly eventually.
So, for now, taking precautions makes a whole bunch of sense.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.