In an internet comments section I was once berated by a reader for not following what they described as the number one rule of trading, that you should trade with conviction. It was obvious that that person had never made a living in a dealing room or on a trading floor. Anybody who has will tell you that the only conviction successful traders possess is the absolute certainty that a good percentage of trades will go wrong, and that something that looks like a great buy one day can look like a screaming sell on another.
That is why, as regular readers will know, I usually suggest stop loss levels for any trade idea that I might present and have no problem changing my view when price or circumstances dictate. Take Tesla (TSLA) for example. Back in March of last year, when the stock was trading at around $230 I advised caution. In many ways, TSLA is a natural buy for anybody who is heavily invested in a traditional energy portfolio, as it provides a hedge against technological advances causing a reduction in oil demand. A year ago, though, that potential benefit didn’t outweigh the soaring valuation of the company. Over the next couple of months the stock dropped below $180, and even after a spectacular recovery is overall down approximately 15% from then until now. During that time the S&P 500 has gained around 13%.
It could be said that that worked out okay. This week, however, after once again failing to turn a profit and in doing so disappointing the market, the same stock looks like a buy. Tesla posted a per share loss in the fourth quarter of $0.13, missing consensus estimates of a $0.31 profit by a mile. That may seem like a funny time to change to a positive view, but there are some sound reasons.
In a letter to investors, CEO Elon Musk and CFO Deepak Ahuja blamed a shortfall in actual deliveries due to a combination of reasons, including bad weather, along with the adverse effects of a strong dollar for the poor performance. Both of those things undoubtedly contributed to the poor results. More worrying to some in the long term, though, and what caused TSLA to drop dramatically from the highs in September is the effects of lower oil, and therefore gasoline, prices on the company. Spending $70,000 on an electric vehicle, the logic goes, makes sense when gas is at $4 per gallon…but at $2? Those making that argument are missing the point. Buying a Tesla doesn’t say “I’m worried about gas prices.”…