Start Taking Profits On Tesla

Last November, I discussed “why I’m selling Tesla shares.” It turned out to be a good spot to sell Tesla (TSLA) shares that we had purchased about a hundred dollars cheaper less than two months earlier. It would be about a half year before we returned to buying Tesla shares.

In April of this year, I asked members of Margin of Safety Investing: “is Tesla About To Beat Estimates?” As it turns out, it was. Our strategy was to wait for TSLA to get under $200 near what we considered a “bottom fishing” price. More aggressive stock investors bought shares of Tesla in May around $190 per share. 

My simple thesis on Tesla is this: 

  • the company is driving change in the automotive space.
  • Elon Musk has generally been ahead of everybody.
  • financing was never a problem given the major backers.
  • the company is exceeding expectations from a position of first mover advantage and as an aspirational brand.
  • the Tesla skeptics are generally uninformed or biased. 
  • the TSLAQ crowd are traders driving a narrative to trade.
  • the stock becomes overvalued from time to time as chasers chase and fanboys refuse to sell regardless of valuation.

I held Tesla shares under $30 per share at one point and sold before the stock ever reached $100. That is my mistake. In the past several years, despite believing the company would do well over time, the valuations prevented me from investing. I have successfully traded it a few times though.

That brings us to today. The stock is approaching overvalued and overbought. It is time for prudent investors to start trimming to take profits. Most won’t, so, if you would like to, you’ll get some time. Here are my brief thoughts on trading Tesla. 

Tesla’s Valuation

Valuing young growth companies is difficult. I try to use Peter Lynch’s PEG ratio most of the time. The problem with Tesla is of course that profits are intermittent at this point. So, a projection is necessary. 

I believe that Tesla will become permanently profitable in 2021 or 2022. This will happen as the cars become less expensive to build, but the price does not fall as fast. Major improvements to batteries are on the distant horizon, so a highly profitable company isn’t likely until the middle 2020s. 

The solar business will likely pick-up at some point, but when is a good question. Battery technology plays a roll here too. 

Ultimately, valuing Telsa becomes a guess based upon comparatives to other car and solar companies. What we know is that there are not a lot of profits in most car companies due to competition. And, solar companies have yet to clear the profitability hurdle with consistency either. 

What does that tell me? It tells me that Tesla is a trading stock until proven otherwise. Valuation is impossible to nail down and anybody who tries is grasping at straws. Tesla will survive, but for their profitability to justify a stock price over $400 per share is wishful thinking anytime soon. 

Tesla Approaching Overbought

TSLA

Chart by TradingView

The institutional bias for Tesla shares has been positive for several months and is not likely to abate for a few more weeks. There is always the possibility that institutions buy longer, but the ebbs and flows are fairly regular. 

When the institutions stop buying with such vigor, then the other technical indicators will start to plateau and then turnover. RSI just entered overbought territory. Chaikin Money Flow, a data set I pay close attention to, seems to have a bit more juice left in the tank. MACD appears to be peaking. Balance of Power is nearing a maximum. The accumulation/distribution line is heading upstairs as well and should move in tandem with the institutional interest. 

All signals combined show a stock in a topping process. The calendar would suggest that window dressing can go on through the end of the year. The January Effect, which is driven by retirement plan inflows into funds, should keep the stock from feeling much pain in January. 

I am recommending starting to scale out of the stock now, in one-sixth increments over the next month. Certainly holding onto one-sixth or one-third of a position as a core long-term holding is acceptable, but, it would be prudent to take more profits and some principle off the table. 

When To Buy Tesla Again

Tesla is the ultimate narrative driven company. Skeptics are negative, fans are positive and traders push whichever narrative makes their trade more likely to work. To trade Tesla is to not take sides, even if you want to. 

Here is a basic range I would look to buy Tesla shares again: 

TSLA

Our “bottom fishing” price remains about $180 per share. However, the upper end of the buy range is around $250 per share now. In a correlated bear market correction, I would wait for the sub $200 price. In a generally bullish environment, I would look to buy closer to $250 on a technical correction. 

It is important to consider what a dilutionary event might mean for Tesla. I don’t believe they will have to sell many shares for financing plants or corporate purposes, however, I think there could be a big acquisition on the horizon. I’ll discuss my general theory on that after Christmas.

Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a Registered Investment Advisor, but publish separately from that entity for self-directed investors. See relevant terms and disclaimers at the website of Bluemound Asset Management, LLC. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.