Tesla's hazard lights are flashing

Don't expect the electric-car maker's profits to keep pace with its stock price.

By TheStreet Staff May 30, 2013 12:46PM
thestreet logo

Electrical plug copyright Jupiterimages, Getty Images, Getty ImagesBy Robert Weinstein  

 

Unless you're a market timer with exceptional day-trading skills, your chances of making money with Tesla (TSLA) are diminishing faster than a Wisconsin State Trooper can say, "Impressive car, but I'm issuing you a speeding violation."

 

You can see my last two Tesla articles from The Street here and here. The main takeaway is that Tesla isn't making money selling electric cars.

 

The money the company has made is through unsustainable tax credits with little hope of a repeat performance anytime soon. In other words, don't count on Tesla's profits keeping pace with its stock price.

 

Tesla isn't alone in building electric cars, but it is alone in the relative valuation. General Motors (GM) and Nissan (NSANY) build electric cars, and, like Tesla, selling electric cars isn't a profit center.

 

Some of the money is already spent, and there is no putting the toothpaste back into the tube. But other money is subject to the whims of state and federal legislators. Without changes, the federal $7,500 tax credit should be phased out (U.S. Department of Energy) beginning with 200,000 vehicles sold.

 

Tesla has a long way to go before it sells 200,000 vehicles, but the fact of diminishing returns shouldn't be lost on investors, especially longer-term investors.

 

In the book "Market Wizards" by Jack Schwager, commodities trader Ed Seykota is interviewed and makes one of the most insightful and salient observations in investing. Seykota said that investors and traders get what they genuinely want out of the markets. If you are seeking excitement, like a passenger on a flight to Vegas, you will surely find it with Tesla. But if you're a serious long-term investor, you're probably more interested in Ford Motor (F), or GM.

 

The choice is yours, and as an active day trader I understand money can be made long or short with Tesla as a day trade and/or swing trade. My investor caution isn't directed at short-term "hit and run" traders because they rely on up-to-the-second market information to coordinate their positions.

 

The person who needs to take a step back and watch the share price momentum is the investor. Unless you have seen this movie before you may not fully understand the dynamics of a short squeeze. Momentum traders recognize that euphoria can switch to panic in a split second. It's the primary reason Tesla whipsaws so quickly.

 

Intuitively, an investor may believe that as the stock moves increasingly higher, shorts are forced to capitulate and further buying is from "real" investment into the company. The reality is that short-sellers come and go and as the stock increasingly becomes overbought, new short-sellers jump on. If the price rise continues, those new short-sellers eventually capitulate and the spike continues higher.

 

The process repeats until short interest falls enough that the squeeze burns itself out like a bottle rocket, or the remaining short-sellers have the stamina (and thick enough stomach lining) to withstand the drawdown. 

 

According to Nasdaq, the number of days required for all shorts to cover based on volume is at the lowest level in the last year. This is backed up with the smallest amount of short interest in the last year, too.

 

There is still heavy short interest in Tesla, but with the increased trading volume it's easy for shorts to enter and exit. Tesla's continued oversized short interest strongly suggests short-sellers believe the reward for maintaining their position is worth the short-term volatility and the risk of being wrong.

 

At the time of publication the author had no position in any of the stocks mentioned.

 

 

More from TheStreet.com

3Comments
May 30, 2013 2:01PM
avatar
You are very foolish to assert that the disappearance of $7,500 federal tax credits will affect Tesla and its shares anytime soon. Through the end of last year, Tesla had not sold even 2,500 of its Roadsters. At full production volume right now, the Model S is being produced at a rate of about 20,000 units/year. The Model X has been delayed to focus on the Model S, plus the production rates should be similar. The Gen-III large-volume vehicles are only slated to be revealed later this year or early next year at the earliest. Notice the word "reveal," as opposed to "sell" or "produce." Especially with a environmentally-conscious President in charge for the next few years, don't expect those credits from Tesla and the federal government to go anywhere soon. 
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

115
115 rated 1
269
269 rated 2
445
445 rated 3
614
614 rated 4
684
684 rated 5
678
678 rated 6
608
608 rated 7
454
454 rated 8
310
310 rated 9
138
138 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ARCPAMERICAN REALTY CAPITAL PROPERTIES Inc10
ATVIACTIVISION BLIZZARD Inc10
BIDUBAIDU Inc10
BMYBRISTOL-MYERS SQUIBB CO.10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.