Tesla Motors Inc (NASDAQ:TSLA) — I last covered TSLA stock in the Trade of the Day on Jan. 6, when I recommended selling it short at $220 with a three-month target of $150. Despite rave reviews received by this electric car pioneer, I thought the stock looked overpriced.
Shares fell to a low of $181.40 on March 27, before bouncing to a high of $210.90 on Wednesday following news that the company delivered more cars in Q1 than initially forecast and the reveal of a new, lower-cost model.
Tesla turned its first annual profit in 2014, reporting earnings of $0.14 per share. S&P Capital IQ estimates the company will earn $1.55 in 2015 and $5 in 2016. However, its analysts have a 12-month price target of $200 on TSLA stock, which is 40 times their 2016 EPS estimate and a significant premium over other auto manufacturers. They also point out that this multiple represents an estimated three-year compound annual growth rate of 55% from 2014, which is a significant reach for any manufacturer.
Even though Telsa may have a jump on the competition, there is no guarantee that other automakers won’t close the gap and produce all-electric models that will be significantly less expensive.
On March 19, my proprietary Collins-Bollinger Reversal (CBR) indicator flashed a new sell signal at about $204, which is still valid despite this week’s rally.
The recent bounce gives traders a good opportunity to enter new short sales at $210 or higher. The target remains $150, which is 28% below the current price. A stop-loss order should be entered at $225.
Short selling is a speculative technique suited only for traders with a high risk tolerance. Check with your broker for their ability to borrow shares, as well as any other special requirements.