Back at the end of May, I wrote in these pages that it was time to reverse positions in Tesla (TSLA). Prior to that, I had been bearish on the stock for a while but suggested then that proximity to a previous low of $178 made for a good level at which to take a profit and initiate a long position. That call worked out well. TSLA hit a low of $176.99 a few days later, then bounced more than 40% over the next couple of months. Now, after a disastrous Q2 earnings report, the opposite is true. If you haven’t already taken a profit and/or reversed to a short position again, now looks like a good time to do so.
Normally I would not make a call like that after a massive drop such as that which followed those earnings, but normal rules don’t apply to TSLA. It is, in that regard and many others, the Donald Trump of stocks.
When Trump was elected in 2016, there was a common theme to most of the political commentary, regardless of whether it came from the left or the right. “Just wait,” everybody said, “before too long, Trump will pivot and become presidential. He may have said some controversial and even shocking things during the campaign, but the weight of the office will change him.” We are still waiting.
Similarly, when Tesla said that they would transition from a niche producer of what most saw as a quirky, futuristic car to a mass producer, supporters of the company told us all it was only a matter of time before they started making huge amounts of money. As the Q2 results, a loss of $1.12 per share versus the $0.31 loss expected, showed once again though, we are still waiting for that pivot too.
The focus at the company has been on meeting production goals and as that has been achieved, the stock has surged. As I have pointed out in the past, however, when you lose money on each car produced, increased production is a double-edged sword.
For long periods of time, that hasn’t mattered in terms of TSLA’s market performance, and for a reason that again is reminiscent of the current occupant of the White House. Tesla is not averse to frequently pointing to their successes, and the constant drumbeat of “good news” on that front seems to make people forget other issues. Right now, however, the issue in focus is that Wall Street doesn’t much care about how popular a manufacturer is or how visionary. They care about how much money they make.
These results will bring the failure to turn a consistent GAAP profit back into the conversation for a while. As analysts digest this news and revise their estimates and target prices, there will be a barrage of bad news; presumably enough to overpower the positivity. So, even after this big drop, TSLA looks set to move lower and once again test the recent lows.
Tesla’s supporters will no doubt point out that none of this matters, and from a long-term perspective they could well be right. The company produces fantastic cars, has a strong brand, and has a sizeable “first to market” type advantage in the EVs which look to be the future of the auto industry. They would also probably say that my comments are typical of the short-sighted view of the market, but I wouldn’t argue with that characterization either. This is not a prediction as to the long-term prospects of the company; it is an assessment of the most likely short-term trajectory of the stock. It is about trading, not investing.
None of that will matter to them though, and that is another similarity to the President. TSLA, like Trump, has a loyal core of supporters, for whom any criticism is an insult, and for whom logical arguments are irrelevant. They will forgive what they consider to be small things in pursuit of the bigger goal. That is a legitimate position in either case, but traders must consider the immediate future.
Polls show that Trump’s supporters are in the minority overall, but they are a big enough minority and loyal enough to give him a fighting chance in 2020. After these numbers, it is likely that Tesla’s supporters will also constitute a minority of investors, but they too are powerful, nonetheless. When this news fades they will reassert that power and the stock will bounce again, but for now, short appears to be a better position in TSLA than long.