Tesla Drives Strong Emotions

 | Nov 19, 2013 | 11:11 AM EST
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Raw emotion -- that's how the trading around Tesla (TSLA) appears to me. Those who own it are saying that it's terrific that Elon Musk, the company's chairman and CEO, has asked the National Transportation Safety Board (NTSB) to look into the three reported Tesla Model S fires. That level of confidence is inspiring; the buyers seem to be saying with their purchasing dollars.

The haters, though, pretty much say the same thing. They are cheering the NTSB members' formal investigation into the car fires -- because why would they bother with an investigation if there isn't something structurally wrong with the car?

The stock itself is like a roadmap and a weighing machine of love and hate. The bears say it is ridiculously overvalued, with a $15 billion market cap and an increase of 277% for the year, especially now that a possible recall could cool sales of the much beloved car. The bulls say it has lost a third of its market capitalization over this fire issue, so the discount is fully priced into the stock price and it is time to buy. Who is right?

As with so many stocks that are classically overvalued, time will tell. If Tesla realizes the promise of selling, say, 200,000 cars worldwide in a short period of time – say within a couple of years -- and the other companies don't deliver successful models to compete with Tesla, then the stock will move higher.

If the company's sales are dented by these fires and, if the company has to redesign the engine in an expensive way, then it the stock is way too high – especially if we see more car fires.

The short-term the situation is more or less controlled by people who like the car vs. people who hate the stock. That's where the emotional imbalance comes in. I believe that Tesla's stock is largely held by retail investors, meaning those who do not have that much savvy about how stocks trade and have little regard for valuation methods, such as price-to-earnings ratios (P/E) and relative worth vs., say, General Motors (GM) or Ford (F) or Toyota (TM).

The short sellers, on the other hand, are betting on these investors coming to their senses and recognizing that the stock's seriously out of whack with the rest of the market. This is why it is so important for them to showcase the fires to the point where you do say, "Wait a second, this is excessive given that cars have fires all of the time and they are a lot more severe than those three that Tesla has had."

But as naïve or, perhaps, as scornful as the investors might be of the ways of traditional metrics, the short sellers seem to be perilously in disregard of their own power to make things go wrong. Way too many of them have ganged up on this stock. The fact that more than a quarter of the float is short the stock means that there isn't enough natural supply to go around to satisfy the retail buyers. The shorts can't create stock and, as long as Musk doesn't need the money -- and it appears that he doesn't -- no new stock's coming on the market. I believe this is why the stock is rallying. There just doesn't seem to be as much worry among real owners to offer enough stock to make Tesla go lower.

It's this battleground between the longs and the shorts, however, which has so many flummoxed -- including me. The war, you see, isn't over the company' stocks, it's over the voracious nature of those who believe vs. those who need the stock down at all costs. That's what makes this a cult equity; it's the most removed from the actual fundamentals of any stock in the market and, therefore, it can't be gamed.

In short, the buyers love it, the sellers hate it, and the trading of unknowable news flow doesn't merit serious analysis, just a sightseeing of the battle from on high and taking in the excitement while distinctly avoiding an actual appearance in the arena. 

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volatility is quite low here, and we could see some downsides here in the short term. ...



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