Tesla (TSLA), me and momentum investing

Why should a company fundamentals-driven investor have a problem with momentum investing?

Two reasons:

–momentum investing is a reactive strategy, and

–one that focuses on the past price movement of the little pieces of paper (or electronic impulses) that trade in the secondary market.

In contrast, fundamental investing is a predictive strategy based on the idea that the price of the paper/bits will ultimately be determined by the value of the underlying company.  Among fundamental investors, value investors believe that the key is the worth of the company as presently constituted (but perhaps running more smoothly than it in fact is).  Growth investors think the key is in early recognition of novel and unexpected profit positives that will fully emerge only in the future.

 

What kind of a thing, reactive or predictive, is my formula for TSLA of:   buy at $180 and sell at $250?  In a sense, I’ve got some fundamental underpinning.  My back-of-the-envelope figuring suggests nothing is likely to happen inside the company Tesla over the next couple of years that could possibly justify more than a $250 price.  And I’m willing to sell at that price even though the stock is still exhibiting positive price momentum.

But how did I get the $180?

What I’ve really done is to take a chart of the stock and draw a line that runs through the lows of the past four years or so and to conclude that this line forms the bottom of a channel (with something like $250 as the top) that TSLA has been navigating itself through since late 2013.  Yes, at $180 I have better potential for upside than I do at $250.  But that’s more a fact about arithmetic than a deep insight into corporate operations at Tesla.

In sum, then, the fundamental underpinning of at least the buying are pretty lame.

So I guess I have to say that there’s a healthier dose of momentum in my fooling around with TSLA than I might like to admit.  On another non-fundamental note, though, this ensures that my California son and I stay in regular contact.

D0w 20,000

The question is whether having a badly constructed, information-poor stock market index achieve a round-number milestone has any significance.

It’s no secret that I’m not a fan of the Dow.  But I am of two minds:

–On the one hand, the Dow Jones Industrial Average, which is what we’re talking about, has been around for a very long time.  It has somehow deflected all attempts over my investing career to replace it in the media with an index that’s more useful, like the S&P 500.  So there’s at least a vague association in the public’s mind between Dow achievements and general economic prosperity.

–On the other, the minute you hear a media pundit use the Dow to interpret the ebb and flow of stocks in general, you know he’s clueless.

The best I can say is that if the Dow can remain higher than 20,000, doing so will have some small positive psychological value.  So I’ll take it.

 

 

Dow 20,000, S&P 2260

I’m not a fan of the Dow.  It’s a weird index whose main virtues are that, way back when, it was the financial media’s first try at measuring the US market and that, despite its peculiarities, it’s easy to calculate.  It’s no longer a useful gauge of US stocks, however.  So it’s never used by professionals, only by media people who have little industry background.  (One caveat:  the Dow indices are now controlled by the same people who own the S&P–who now have a vested interested in keeping the Dow alive, despite its drawbacks.)

Still, it’s striking that for the past six weeks 20,000 on the Dow has shown itself to be a strong point of resistance to the US stock market’s upward movement.  The equivalent figure for the S&P 500 is 2260, not a memorable number.

Whether the resistance level is 20,000 or 2260 makes little economic or financial difference.  Psychologically, however, 20,000 is much more daunting, I think, than 2260.  This is especially so now that the US stock market has risen far above former highs.

My bottom line is that, whatever number you choose, the post-election rally has run into its first substantial roadblock.  It’s also at least thinkable that the Dow is developing, at least for the moment, more relevance than I’m willing to give it credit for.  This would suggest that the balance of market power is shifting away from professionals to individual investors who have little stock market experience.    I find this hard to believe, but it’s something I should keep an eye anyway.

 

today’s S&P 500 trading will be interesting

The S&P 500 closed on Wednesday at 2119, after touching 2120 for a moment mid-day.  That’s within an eyelash of the 2124 and 2128 daily closing highs of last July and the intraday high for the index of 2132 made at the same time. (Note:  I’ve always thought intraday figures are more important than closing, even if they’re a tiny bit more effort to look up. That’s not the consensus view, though.  Arguably, that makes them even more important.)

This is the best attempt the S&P has made since then to test the old highs–which have so far proved firmly resistant to being bettered.

Yesterday, the market rallied from intra-day lows to close down, but not badly down, from Wednesday levels.

In the pre-market today, the S&P is showing the most significant weakness it has in a while, although we’re still talking about just over a half-percent.  We also know that dabblers in the pre-market are often derivatives traders who exert little influence on how trading in the stocks themselves plays out.  So pre-market action may have little predictive value.

In any event, I think that today’s trading might give us some insight into what the general mood of the market may be in coming weeks.

Possibilities:

–a breakout above the current historical index highs would be a very bullish sign.  But that might be like expecting a pony for your birthday, just too much to ask.

–a reflex decline, where short-term traders, having determined that the market can’t go higher, try to push prices down to see how far they can decline

“backing and filling,” which is what technicians often call a sideways market, where stocks bob around in the space between–in this case–the May levels of 2050 or so and the new ground of 2100+ while they gather strength for a further advance.

If I had to pick one of the three right now, I’d select the third.  One twist, though.  It seems to me that as the market struggles higher, it is also reorienting itself further toward secular growth themes, specifically Millennials vs. Boomers and internet vs. physical presence.  I expect that process to continue, no matter what the overall market direction.

what I find most surprising about Tesla (TSLA)

a concept stock

My California son got me interested in TSLA a couple of years ago.

It’s a “concept” stock.  That is, the stock trades on the dream or vision of future revenue and profit.

…like Amazon

In many ways, it’s like Amazon (AMZN) was in the late 1990s.

That company seemed to me to be on the verge of financial disaster for most of the first decade of its existence.  It only began to be profitable after it expanded from its original virtual bookstore idea to becoming an online department store.  In my view, had AMZN not aggressively raised a lot of capital during the Internet Bubble, it would not have survived.  After all, it lost money eight (?) years in a row before breaking into the black.

the center of an empire

TSLA is the seat of the Elon Musk empire.  Some say it’s a car company (me included); some would characterize it ultimately as a battery company, with cars as the wrapper that contains the principal TSLA product.

the stock

The stock is now trading at $260 or so a share, giving TSLA a market capitalization of about $39 billion.  Suppose we think, to make up a number, that the stock should trade at 30x earnings.  If so, the current price expresses investor belief that at some point the company will be making $1.3 billion a year and still have, say, 20% growth in annual profit in prospect.

back of the envelope numbers

Let’s say TSLA is a car company and that it will be making on average $7,000 a car, after tax, on its output at some future date.  If so, the current market price already factors into it that TSLA will be selling about 200,000 cars a year–and expanding rapidly.

I think that’s possible.  More important, the market says that’s what investors are willing to believe, and pay for.

risks

There are risks, yes, the most obvious of which is that the company keeps pushing back the date when it will turn cash flow positive.  What cash flow positive means is that the company will be able to generate enough cash from operations to cover costs, and will no longer be eating into its cash reserves to make ends meet.

what I find surprising

What’s stunning, though, is that less than two months ago the stock was trading at just over $141, or just over half today’s price.

New information has come out since then:

–TSLA began taking deposits for its $35,000 base price Model 3.  In less than a week, it has collected $1,000 each for about 300,000 units, with enough add-ons to bring the average selling price to $42,000. Most won’t receive their cars until 2018.  This support seems to me to show there’s potentially huge demand for electric cars, even at today’s lower oil price.

–the company announced that it missed its 1Q16 sales target because of parts shortages.  Presumably this means it did not turn cash flow positive as anticipated during the quarter.  That’s bad, especially since we’ve heard this song before.

the stock price

The stock is up $10-$20 a share on the two items, which were announced at roughly the same time.

What I find interesting is that a relatively large market cap company can move from $140 to $240 in a matter of weeks on a change in sentiment.  That’s about 70%!

So much for efficient markets and investor rationality   …not that anyone outside the ivory tower believes in this stuff.  But this is a huge move.

algorithmic trading?

I think it’s evidence of relatively naive algorithmic trading at work (based ultimately on two other wacky academic ideas–that the most important thing in investing is to control costs, and that there’s no craft skill/specialized knowledge involved in investing).

I also see it as support for my view that trading can be unusually profitable in this environment.   We should look for other instances where this may be happening.

 

 

 

how high is “high” for the S&P 500 now?

One of the most reliable aspects of human behavior is that we all extrapolate from recent prior experience.  We form rules that are at first provisionary, but which gain strength as new experience seems to validate them.

This is the psychological basis for one of the few really powerful axioms of technical analysis, support and resistance.

The idea is that people buy financial assets at prices that in the past have proved profitable entry points and sell at prices that have shown themselves to be relatively high.  Put in more negative, but still psychologically valid, terms, I think, people who have previously sold at low points and bought at highs rue their decisions and reverse them if given another chance.   This provides, as it were, a built-in clientele of buyers at previous lows and sellers at prior highs.

How do we apply this insight to today’s S&P?

Simple.

The S&P 500 peaked at:

2110 on February 20, 2015

2108 on March 20, 2015

2130 on May 25, 2015

2124 on June 23, 2015

2128 on July 20, 2015

2102 on August 17, 2015

2110 on November 15, 2015

2102 on December 1, 2015, and

2078 on December 29, 2015.

 

We closed yesterday at 1986.  Fundamentals aside, about 5% – 6% higher than that we run into a wall of people who have been trained that 2100 or so is a time to sell.

Such resistance levels aren’t insurmountable obstacles.  Breaking through them, and therefore beginning a new buy/sell training regime, would be a hugely positive sign.  But the large number of recent instances when 2100-2130 has proved a market high water mark argues that this is a formidable barrier to advance.