The first month of the year isn’t even half over, and Tesla stock is already up by 25%. It has more than doubled over the last 3 months. How much higher could this stock go?
Tesla serves as an excellent example of how it pays to ride a stock while it’s hot. Tesla has been all of that lately, taking off like a rocket about 3 months ago and more than doubling its price over this short period. December was a particularly hot month where it went up by 27%, and after adding another 25% in January so far, could this rocket be finished climbing and finally heading down towards earth?
It’s hard to imagine Tesla trading as low as $176.99 earlier in the year, where it was down 42% on the year and things looked terrible. By the time we wrote our last article on this stock, it had made all of that back and looked poised for more.
We told you back then that trying to predict where a stock run will end needs to be treated like a guess, and the only real way to tell this is to have the stock speak for itself, and stick with it until it does tell us that it is done. It has gone straight up from there as it turned out, in a manner that did not even hint of slowing down, let alone stopping, and we’re now $200 higher and still counting,
If you are eager to bail on the hottest stock in the market, if you’re not holding this during a time like this, what would you be holding? The fact that we haven’t seen a pullback though the parabolic run of December and January tells us that the market itself isn’t ready to bail, although this doesn’t prevent individual investors from jumping off.
Tesla has catapulted itself from their improved outlook lately, and wasn’t even their turning in a surprising profit for the quarter of $0.78 per share when the street was expecting a loss, it’s the way that the forward numbers are starting to come together that is really setting a fire under this stock.
We’ve had these numbers for a while, and all of this doubling of the stock has occurred well after they were announced. This is what we call people jumping on a bandwagon, and Tesla’s sure has been filling up of late, with people hanging off it as it parades up Wall Street as the reigning champion by a long shot.
Tesla didn’t make it to our top 5 stock picks of the year because it wasn’t up enough in 2019 to qualify, but it sure spoke loudly for the principle behind these picks, which is that stocks with a lot of momentum tend to have more going forward than stocks with less momentum. Tesla is momentum, personified, lately.
We now can see the light at the end of the tunnel, if forward earnings projections can be relied upon. This is what these analysts are paid to do, and while they may not be very good at advising us on what to buy and hold, they do a pretty good job on this end of things.
Based upon the consensus projections, earnings are expected to grow to $3.05 in 2020, to $11.44 per share in 2021, and to $18.40 in 2022. Those are some pretty heady numbers indeed, and based upon today’s prices, this would provide us with a P/E ratio of 28 in a couple of years.
This is what is driving the price now, and this long-suffering company and stock looks like it is finally going to make it out of the woods after all these years of not being able to figure out how to make money selling these cars.
The only way out of this mess was to be able to scale up enough, and while many have been skeptical of their being able to pull this off anytime soon, including us, they are at least on a course to do this now and to do it starting from right here.
Tesla’s next earnings call is set for January 29, and while they are expected to book yet another loss, the real focus will remain on well down the highway as people lick their chops about the prospect of Tesla enjoying their first profitable year in 2020, with things presumably only set to get better.
This has always been the big challenge, to go from the odd quarter of profitability sprinkled in with mostly losing quarters and losing years one after another. Seeing is believing, but seeing at least the projections believing goes a long way toward getting more to believe.
We Need the Party to End Before We Leave
People are starting to get edgy now though, given this huge run-up, and among the nervous is Baird analyst Ben Kallo, who recently downgraded the stock to a hold and recommended that people take profits.
Those who followed that advice back on January 9 are probably wringing their hands, as the stock has climbed 9% in the brief period since. There will be a time for this, but not when it’s red hot like this.
If we did this and at least come away from this with a lesson about why we should never do this again, perhaps the lesson was worth it. There is no bigger mistake than getting out of a stock at a time when it is the most bullish, other than staying in it when it is most bearish. Bullishness is why we hold stocks on the long side, so when we have this much of it and we don’t ride it, we are not focused on what matters.
Investors don’t really grapple with these decisions very much, in contrast to traders, where taking profits too soon can be a daily battle for a lot of traders. There are some successful traders that do take profits before their time, where the time is set by the market, even though they could have done better by waiting for moves to end first. When we guess, we guess wrong a lot, but if we only watch and refrain from guessing, we won’t be on the sidelines when they just keep going.
Traders therefore have to sort out this problem if they are going to survive, because winning at this game means making more money than you lose, and few traders are good enough to be able to do this while cutting their winners short out of fear.
The principle behind staying in is derived incrementally, where it doesn’t really matter where things end up in the end, it only matters where things are moving now. We need to look at the probability of a stock going up some more right now, and with a stock as hot as Tesla has been, this number is extraordinarily high.
If you were given a chance to bet on a stock that would be up tomorrow, or next week, Tesla would have been a very good choice due to how much momentum it currently has. This is exactly what we do when we invest, although a stock like Tesla is going to really need to be treated with kid gloves and this is not a stock that we want to just be holding and not paying close attention with.
Sooner or later, this frenzy that is driving the stock higher and higher has to slow down, and at that point, there will be plenty of traders taking their profits as they were only in for the good times, and even if you want to be in the stock in 2022 and beyond, this does not mean that you have to go along with the rides down along the way.
This might be the biggest lesson that most investors have to learn, and while Kallo’s advice of profit taking may have been premature, there does come a time where it is wise to do such a thing.
We need to be doing it when the expectation of losses exceeds the expectation of profits though, which isn’t now but could be right around the corner. Like the trader who is afraid to let his or her profits run and ends up failing at the game as a result, investors can really help themselves by both letting their profits run and by stepping aside when these profits start to evaporate.
We Just Don’t Know How Far We Can Go, so we Need to Watch and Be Ready
Nobody knew how high Tesla may be headed in 2019, and no one knows how high it can go in 2020, and throwing our targets isn’t helpful at all because they are based upon guesses that simply may not play out. When the move is over, the market will decide, and we will know then, and trying to predict this in advance is downright foolish and serves no practical purpose other than to just say you have a target and perhaps be entertained by how close you come, or not.
Anyone that holds to hit a target and ends up ignoring the real story of how a stock is trading does not deserve to do well. If we are holding out for $600 and we make it to $550 and then go way down, who knows when it may take another serious run at $600 again, and you could have punched your ticket here and looked to get back in at a better time to continue to pursue your dream if you wish.
Oppenheimer analyst Rusch has such a number in mind, $612 to be exact, which he just raised from his former target of $385. $385 has been plenty wrong, and imagine how upset those who have sold there because they believed him must be. While you normally want to get right back in when you make a mistake like this, the fact that this isn’t supposed to go higher than that does influence people, where they lament each further rise without them more and more but still don’t act.
Tesla may indeed make it to $612, or perhaps beyond, and if it does go this far, we don’t just want to be jumping off due to some arbitrary number that someone made up. The fact that we could ever predict such a thing requires that we believe in fundamentals solely driving stock prices, which is a lot like believing in Santa Claus. A lot of kids do, but they don’t know any better.
We don’t have our parents to rely on to tell us that this particular Santa Claus doesn’t exist, other than in thought, and it is only when we stop believing in such things that we can even understand what moves stocks, which is ultimately momentum itself, based upon any number of factors that are being relied on, including momentum itself.
There are a lot more people buying Tesla stock now than a few months ago, and you can bet that seeing the stock go up as much as it did serve to excite them and have a material effect upon its demand. The same thing happens on the sell side, where the momentum changes direction and this selling begets more selling in the same way that more buying begets more buying.
This is where we are at right now, watching the stock continue to rise and wanting to be in it while it does. While we have come so far that we may rightly wonder how much juice this has left, where it may be pulling over soon to recharge its batteries, we really can’t see the gauge like the analysts think we can, and we at least need to wait until it stops before we should want to jump out.
Having your hand on the door handle isn’t a bad idea with this though, as with parabolic rises like this, there is a greater risk that the sell-off will be bigger as well. A lot of people jump on these bulls for just this particular ride, and when they start getting knocked off them, they cash out. We’ve seen this before with Tesla and it is particularly prone to the effect of these things, but it has never run up like this before and the aftermath of the profit taking we’ll see when it loses momentum may be particularly significant.
For now, it is still going up, the light remains green, and we should still have our foot on the accelerator with Tesla, and if anything, we should have added to it along the way, not taken profits yet. If the market puts on the brakes, and they may soon, we will feel it, going at such a speed. Tesla is a fast car indeed, but this makes it even more important to keep our eyes on the road.
It doesn’t matter if we’re bullish or bearish further out, aside from the need to be more observant when our outlook and the stock diverges. Maybe Tesla will tank soon. It isn’t now. The facts always speak and need to be closely listened to. We act in the present and must decide based upon what’s going on now of we want to get it right.