Stock Review of the Day
Stock:  TSLA (Tesla Inc)
Summary:  OVERPRICED

Score: 10/20
MOS: 0%
Share Price:  $733
Sticker Price:  $346

Tesla was founded in 2003 and is based out of Palo Alto, CA.  Tesla is known for its automobiles but it also sells battery energy storage, solar panels, and solar roof tiles.

This is definitely one of the most popular high flying growth stocks in the last few years.  It’s time that I provide a little insight on this stock before the next quarterly and annual report.  The overall theme you’re about to read is BE CAREFUL.

TSLA’s share price has increase by 700% since January of last year.  It’s one of the most emotionally driven investments I’ve seen in a long time but will it last?

Here are three reasons why you should be careful with this stock…

  1. On November 29th of 2020, The Motley Fool released this article which talks about TSLA having a market cap higher than GM, Ford, Toyota, Volkswagen, Honda, Nissan, Ferrari, and Fiat Chrysler COMBINED yet only produced 500,000 vehicles in 2020.  Proof of a significant overvaluation.  
  2. On January 5th of 2021, The Motley Fool released this article which talks about TSLA struggling to generate a recurring profit which could result in a 50% share price decline in 2021.
  3. On December 2nd of 2020, this article from CNN reports that Elon Musk told his employees they need to cut costs or they can kiss its lofty stock price goodbye.  Musk acknowledged that Tesla’s actual profit margin is fairly low, only about 1%, and that the stock price is due to investor expectations of future profits rather than recent results.  His exact words were “If, at any point, they conclude that’s not going to happen, our stock will immediately get crushed like a soufflé under a sledgehammer!”

There is evidence here that the stock could drop significantly at the next earnings date which is targeted to be January 27th, 2021.

My suggestion is to set your Trailing Stop Losses now.  If you don’t know how to set that up, please reach out to your broker.  They can quickly teach you.

A trailing stop loss works by setting a sell price as the stock declines.  This way, as the stock continues to increase, you’ll keep making more money, but if the stock starts to decrease considerably, the stock will sell and you’ll take a profit.  This prevents massive downside losses.

On speculative stocks and high flying growth stocks, I typically suggest a trailing stop loss of around 10%.  In other words, as the stock declines 10% from its most recent high, it will sell.  

Before you set your trailing stop losses, you’ll need to determine your Adjusted Cost Per Share.  This is the average price you bought the share at.  You’ll want to make sure you set a trailing stop loss HIGHER than your adjusted cost per share so you don’t take a loss.

Knowing that that share price is $733, a 10% trailing stop loss price target would be about $660.  In this case, you would set your trailing stop loss at $73.  In other words, as the share price falls by $73 from the most recent high, the stock will sell.

Overall, if we hear bad news on (or around) January 27th, and TSLA starts to nose dive, the stock will sell so you only take a 10% loss compared to The Motley Fool prediction of a 50% loss.

There are many times in history where stocks and assets have climbed high but fallen straight back down.  You want to be in a position where you take profits and get out before they hit the bottom.

Examples:

  • CGC (Canopy Growth) in 2019.  The stock hit $49 in April of 2019.  Within 6 months it was down to $15.  A 69% loss.
  • Bitcoin in 2017.  This asset nearly hit $19,000 in December of 2017.  Within 2 months it was down to $8,000.  A 57% loss.  Bitcoin has been on a recent climb but it could face another correction very soon.
  • CCL (Carnival) in 2020.  This stock hit $49 in February of 2020.  Within 1 month is was down to $12.  A 75% loss.

With a score of 10/20, the financials are okay but the scary indicator is the MOS of 0% (Share Price of $733 vs a Sticker Price of $346).

What do you think?

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All stock reviews are for entertainment purposes only. Reviews are not financial advice.

Blog Post Author
Sean Tepper