The equity markets had a bit of a tizzy last week. The damage wasn’t too serious, since the major indices are still within 2% of the all-time highs. However Tesla (NASDAQ:TSLA) had an OK week overall. Yes, TSLA stock 2.5% on Friday but it was only to retest the breakout from three days before that.
Market sentiment definitely suffered a blow and that is really what matters most. Reality is not what drives stock price is in the short term. How people feel about things is a powerful motivator. Sentiment has soured and the stock market fell.
Overall the bulls are still in charge of TSLA stock in the near term. They have been in a trend of higher-lows and higher-highs since the middle of May. They are now coming up against prior hard failures from April. Those won’t be easy to break through, so it might take a couple of tries.
But if the overall stock markets remain healthy, Tesla bulls will eventually prevail.
Stop Shorting Tesla Shares
Those who have tried to short TSLA stock all along have lost a tremendous amount of money. They still flock to it like moths to light. Maybe they missed the change it underwent recently.
Shorting a company that generates almost $6 billion in cash from its own operations is tough. Critics also complain about the artificial contributors like tax credits. Ultimately it doesn’t really matter where the money comes from as long as it keeps flowing.
The world is undergoing a major shift in automotive trend. It will require more than a decade, but the internal combustion engine (ICE) is on its way out. The leading replacement is currently the electrical vehicle. We will need a giant leap in battery tech else the vehicle of the future will be a hybrid. In the meantime, Tesla is the leading cause for this trend.
They made it made the idea of driving electrical vehicles mainstream. They will have the first-mover advantage for a while, although the competition is fierce and coming fast.
I don’t mean Nio (NYSE:NIO) and XPeng (NYSE:XPEV) although they are two worthy competitors.
Rather, it is the legacy automakers that will catch up quickly. Audi, for example, and BMW (OCTMKTS:BMWYY) are making tremendous improvements just based on my own neighborhood. I live in southern California, which is Tesla country. And I’m starting to see a lot of the competition driving around.
How to Trade TSLA Stock
Regardless there is plenty of room for TSLA stock to grow even with the hot competition. The company is healthy and the price-to-sales is getting leaner. This is an indicator of how much froth there is in the stock. Current investors are twice as realistic as they were just a few years ago. This is a byproduct of fast growth. Therefore, it’s not a coincidence that the company is leading with deliveries as well.
Don’t take my word for it. Just look at the profit-and-loss statement. Total revenue almost quadrupled since 2017. Tax advantages cannot be the sole cause for this. At one point recently the experts all but called it dead. Here it is the phoenix with a net income of $2 billion.
At some point the critics may have to admit defeat. In the meantime, it is smart to trade it tactically.
Those who held TSLA stock from the beginning have had the opportunity to now be playing with house money. Investors can still own it for the long term under the same premise that the first wave of investors did.
Tactically, I would rather chase it above $780 or closer to $700 per share. The strategy is to either buy the dip, or chase the rip after the breakout from the April highs. I don’t judge the company by its reputation on Wall Street.
For the short term, I use the charts because after all price is truth. For the longer term, I add a layer of fundamentals. This I can derive from the actual financial metrics.
Stay Nimble
Tesla made the turn in 2018 when it flipped to positive cash flow from its own operations. That gives management the freedom to execute on its wild plans. Now they can concentrate on the non-car ventures that everybody’s been dreaming about for years.
If the stock market corrects, TSLA stock could fall below $600. Although I am not calling for that to happen now, that would make for an excellent opportunity.
I mention this because markets are too high, and susceptible to surprise shocks. At these levels, investors will do well to infuse a lot of doubt in their investment thesis. We don’t know what shoe can drop next. The Federal Reserve will soon start rolling back their asset-purchase program. We’ve had a taper tantrum before, hopefully we won’t repeat it.
Caution is still the best course of action regardless of the individual scenario for TSLA stock.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
