Buying or Writing Tesla off? Read This First.
Listen to this post
Editor’s Note: Today’s TradeSmith Daily issue first appeared in Jason Bodner’s Power Trends.
Like him or not, Elon Musk is a brilliant innovator.
He is six for six in the win column when it comes to starting, ramping up, and owning successful businesses, which include PayPal Holdings Inc. (PYPL), SpaceX, SolarCity, and Tesla Inc. (TSLA).
Tesla is what I want to talk about today.
- One of the most widely held stocks in the world.
- One of the most searched stocks on the web.
- The leader in the massive shift to electric vehicles (EVs).
And yet, TSLA shares are down 40% in the last 12 months – and that’s after a recent bounce.
Is this a chance to buy one of the world’s most innovative and valuable companies at a steep discount?
Or is the shine coming off the goldmine that this stock has been in the past few years?
There’s a lot to unpack there, including Musk himself. This is one of those rare instances where he may be as important to investors as the sales and earnings of the companies he owns and runs.
But rather than let our feelings or emotions about Musk answer the question, let’s run it through my algorithms and see what the data tells us.
Wall Street Is No HelpThis is the perfect time to analyze the data because Tesla reported quarterly results last week.
If you read the analysis coming out of Wall Street, you don’t know what the heck to do. A quick glance at Yahoo Finance on Friday showed a Goldman analyst forecasting “big upside” and a Jeffries analyst calling Musk “the enemy inside of Tesla.”
The numbers themselves were good. Tesla earned $1.19 per share, beating expectations for $1.13. Sales of $24.3 billion were slightly ahead of estimates for $24.2 billion. Musk said the company could make two million cars this year, up from 1.4 million in 2022.
The company also said that orders remain strong at about twice what the company is producing. After recent price cuts, the company said orders are as strong as ever.
However, price cuts mean Tesla makes less money, and some analysts were concerned about gross profit margins – which were the lowest in more than a year – both now and in the future.
These Are the Meaningful NumbersAs a reminder, my system uncovers stocks with outstanding fundamentals, strong technical and price action, and Big Money flowing in from institutions. After more than 20 years of research and backtesting, my system is honed to identify the standout stocks with the highest probability of investing success.
My system rolls all of the algorithms and dozens of data points into one score, which I call the Quantum Score.
Tesla’s Quantum Score is 70.7, which is not in the perfect sweet spot but is quite good. The ideal score to buy is usually in the 80s, and I avoid stocks under 50.
Let’s drill down into the three principal areas.
Fundamentals: Looking at the health of the business, Tesla rates high with a Fundamental Score of 83.4. Earnings and sales growth are strong. The profit margin has been good in the past, though this bears watching. Debt is manageable. Valuation metrics are mixed.
Technicals: Price action gives us a different picture, which you would expect given TSLA’s big drop the last 12 months. Its Technical Score is a decent but not spectacular 61.8. Plenty of stocks are better; plenty of stocks are worse. That Technical Score was much lower before last week’s huge 33% bounce.
Big Money: This is what we might call the “secret sauce” of my system. My time managing a trading desk allowed me to see up close and personal how institutions and hedge funds try to keep their buying quiet. If they throw millions of dollars into a stock at one time, the intense buying pressure would send the price through the roof.
Big Money has mostly sold Tesla over the last three months, and not surprisingly, shares are down nearly 25% in that time. I’ll show you the chart of TSLA’s share price from my system, and those red bars are unusually high levels of Big Money selling.
But here is some important context. If we zoom out over the last three years, we see plenty of Big Money buying (the green bars) and corresponding share price surges. We also see a reliable pattern of the share price bouncing (orange diagonal lines) after Big Money sells (red bars).
The VerdictTaking all of these factors into consideration, I see a probable buying opportunity in TSLA right now.
Fundamentals remain strong. Price action is improving. And the stock is following its usual pattern of rallying after Big Money sells.
But one of our key factors is missing – Big Money buying.
I would wait for confirmation of that before investing. The stock can go higher without it, but the odds of success increase dramatically with it. Big Money tends to buy over time to spread out its purchases, so a signal of unusually high amounts flowing into the stock would bode well for a longer-lasting run.
As always, my advice is to focus on companies with the trifecta of investing success – strong fundamentals, strong technicals, and Big Money pouring in. TSLA may well be a good buy here, but it does not possess all of the characteristics to the degree that elevates it to an elite moneymaking opportunity.