If 2020 proved anything in the financial markets, it’s that expensive stocks are capable of becoming more expensive. And indeed, every time the skeptics think that the hype cycle surrounding Tesla (NASDAQ:TSLA) is about to end, somehow Tesla stock just keeps on climbing higher.
For that reason alone, I wouldn’t dare to short-sell Tesla stock. Even if you believe that the balloon will burst at some point, just bear in mind that irrational markets can outlast your brokerage account.
Yet, while I won’t recommend short-selling Tesla stock, it might be advisable to consider taking profits and/or staying out of the trade altogether.
Even if the electric vehicle sector is on fire now and gravity seems irrelevant, valuations will matter again at some point. Besides, peak optimism isn’t necessarily the ideal time to load up on any asset, even if it’s a big winner like Tesla stock.
A Closer Look at Tesla Stock
Honestly, it’s not difficult to find evidence that Tesla stock is expensive. Just pick a metric, any metric. I’ll use my go-to, which is the trailing 12-month price-to-earnings ratio.
That number comes to a whopping 1,448.15 for Tesla stock. Contrarian and value-focused investors should bristle at that P/E ratio. Even the “momo” (momentum-focused) traders ought to admit that the Tesla share price is ahead of itself.
Another way to assess Tesla stock is by looking at the 52-week range, which is from $70.10 to $761.50 (after factoring in the Aug. 21 five-for-one stock split). It’s rational to want to take profits when a stock is 10 times its former price.
To put it another way, we’re talking about a stock that’s among the most expensive popular stocks on the market (more than $750 per share), after a five-for-one split. If that doesn’t spell bubble trouble, I don’t know what would.
Bull Case Acknowledged
Now, let’s not kid ourselves and pretend that Tesla, as an automaker, isn’t growing.
The data does indicate that Tesla’s making good progress. Not long ago, Tesla revealed that the company delivered 499,550 vehicles in 2020. That represents a 36% increase compared to Tesla’s vehicle deliveries of the prior year.
Furthermore, Tesla ended the year on a strong note. Specifically, the automaker delivered 180,570 vehicles during 2020’s fourth quarter. That marks a new quarterly record as well as a 30% improvement compared to the previous quarter’s vehicle deliveries.
As long as electric vehicles, and renewable energy generally, remain a high-growth market, there will be room for Tesla stock to grow. I’m only suggesting that a corrective phase may be imminent as every stock must take a breather at some point.
A Double-Edged Sword
Along with the stock-share split, another notable event for Tesla stock in 2020 was its inclusion in the S&P 500 index. Amid much fanfare, that event occurred on Dec. 21.
That’s a milestone, no doubt about it, but it could also be considered a double-edged sword. By that, I mean it has good and bad aspects.
For Tesla, what’s good about joining the S&P 500 is that many index-fund investors will now end up owning Tesla stock, albeit indirectly and sometimes unknowingly.
However, GLJ Research founder and CEO Gordon Johnson notes a potential disadvantage of joining the index. In particular, Tesla and its notoriously bombastic CEO, Elon Musk, may be subject to more rigorous examination by typically cautious institutional investors.
“When you get included into a big index like the S&P, scrutiny increases. People ask, ‘What do I own?’… People are going to look beyond Elon Musk’s claims… You’re going to have to look to the fundamentals of this business, and I think that’s where Tesla could have some problems,” explains Johnson.
That’s a fair point. Back when Tesla stock was primarily the plaything of amateur traders, scrutiny wasn’t as much of a concern. Now, as a major S&P 500 component, it could be more business and less pleasure for Tesla stock.
The Bottom Line
There’s no denying that the ride has been fun and profitable for Tesla stock holders. And, that ride could continue for a while longer.
Betting against Tesla stock could be an act of self-destruction. However, it is certainly possible to take profits if you have them.
The best strategy might be to wait until Tesla stock comes down before taking a long position. Trust me, every stock comes down at some point. Even high-flying Tesla stock will, at some point, be subject to the law of gravity.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.
