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Tesla Shares Appear More Vulnerable As They Near Bear Market Territory

By Investing.com (Haris Anwar/Investing.com)Stock MarketsSep 04, 2020 04:39AM ET
www.investing.com/analysis/tesla-shares-appear-more-vulnerable-as-they-near-bear-market-territory-200536331
Tesla Shares Appear More Vulnerable As They Near Bear Market Territory
By Investing.com (Haris Anwar/Investing.com)   |  Sep 04, 2020 04:39AM ET
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It’s been a really bad trade to bet against Tesla (NASDAQ:TSLA) this year. Every small correction was followed by a powerful rally, pushing the stock to new highs almost every day.

Tesla shares have surged about 500% this year, fuelled by improved car sales even during the pandemic and the company producing a profit for the fourth straight quarter.

But that remarkable run seems to be taking a breather this week as Tesla shares have fallen every day since hitting a record close on Monday, which was the first day of its stock-split trading.

Tesla stock was down another 9% on Thursday closing at $407, adding to a 17% decline since Monday's close. A stock is considered to be correcting when it falls more than 10% from the latest high, while a 20%-plunge would put it in a bear market.

On the face of it, there were two announcements this week that triggered this downside move amid the general weakness in tech shares.

TSLA 1-Day
TSLA 1-Day

First, it was Tesla’s plan to sell shares in the market that could dilute its value. The company said in a regulatory filing on Tuesday that it plans to sell as much as $5 billion in shares “from time to time” to fund growth as the company doubles its factory count.

That news was followed by Baillie Gifford’s regulatory filing that showed the company’s largest shareholder had cut his holding in the company. The Edinburgh-based investor held a 4.25% stake in Tesla as of the end of August, down from 7.67% in February and 6.32% in June. According to Tesla’s current $382-billion market valuation, the stake is worth $16.2 billion.

No Fundamental Justification

Again, it’s hard to tell whether this correction is the beginning of a massive move to the downside, but many analysts believe that the stock’s powerful run since its decision to announce a stock split had no fundamental justification.

Early last month, Tesla announced it would split its shares in a 5-for-1 exchange, a move designed to make the stock less expensive. Tesla jumped more than 80% between when the company announced a stock split on Aug. 11, and when it actually went into effect on Aug. 31 even though stock splits are purely cosmetic.

With this momentum created by the stock split, Tesla shares were also in demand ahead of its widely expected inclusion in the coveted S&P 500 Index. The car-maker became eligible for an S&P 500 slot after it reported profits for four consecutive quarters.

If that happens, it will make the stock a must-buy for mutual and exchange-traded funds that seek to mimic the benchmark index. At least $1.6 trillion of mutual and exchange-traded funds track the S&P, according to Morningstar Direct data.

In our view, this is certainly not a good time for long-term investors who buy stocks on their fundamental strength to buy Tesla stock. The retail frenzy, fuelled by the stay-at-home environment, has made Tesla valuation almost impossible to justify.

In a note carried by CNBC, Credit Suisse told its clients that four key factors have been driving the rapid appreciation in Tesla shares, including short investors covering their positions and passive investors purchasing shares ahead of possible inclusion in the S&P 500. In other words, reasons beyond the company’s fundamentals are driving stock performance.

Bottom Line

Without reading too much into this week’s correction, it’s no secret that Tesla and other growth stocks have immensely benefited from the availability of easy money and 1.5% margin loans. These monetary conditions have pushed these stocks’ valuations to an unrealistic level, triggering the law of gravity. It’s our view that it’s not the right time to buy Tesla stock, which also has the tendency to lead in any downward move.

Tesla Shares Appear More Vulnerable As They Near Bear Market Territory
 

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Tesla Shares Appear More Vulnerable As They Near Bear Market Territory

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Comments (8)
Simon Larcher
Simon Larcher Sep 07, 2020 6:21AM ET
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Cant wait to see tomorrow...
Active Trader
Active Trader Sep 06, 2020 10:27AM ET
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How can we call this healthy pullback as near bear market territory? It looks very bullish
red stallone
red stallone Sep 05, 2020 2:50AM ET
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You easily get shaken bru
Jay Rhyder
Jay Rhyder Sep 04, 2020 4:50PM ET
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People get scared so easily...
Million Dollar
Million Dollar Sep 04, 2020 4:50PM ET
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Loooool lets play again on Monday
Nabil Elshafeay
Nabil Elshafeay Sep 04, 2020 1:39PM ET
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tesla, Amazon and zoom , are all over priced
whisky noob
whisky noob Sep 04, 2020 1:33PM ET
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overprice & overhype, that's it
Robert Victor
Robert Victor Sep 04, 2020 10:39AM ET
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Interestingly, I've spent the past five weeks along I-5 in far Northern California..essentially the only route other than rail to the Northwest (Oregon & Washington). Tesla has been moving literally thousands of Teslas by carrier northward- no idea from where or to where. BUT, these do not appear to be "sold" Teslas. They are at least 90% Model 3s, and each carrier seems to be filled (10) with new cars of the same color. Previous observations for sold vehicles always included mixtures of models and colors. Some have said in the past that Tesla overproduces and then tries to conceal their overstock- it appears that they're trying to hide it in the Pacific Northwest for now.
gene seimins
gene seimins Sep 04, 2020 10:39AM ET
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Hide it? Lol you are hilarious... they cant meet their demsmd and you day iver produce and hide? Jeez
Gery Fung
Gery Fung Sep 04, 2020 10:39AM ET
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in Vancouver, BC the wait times are over 4 weeks after you order a model 3. that's where all these model 3's are going. it doesn't take much investigating to find this out.
Jonathan Jones
Jonathan Jones Sep 04, 2020 10:39AM ET
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thats a ridiculous assumption and I'm not even pro-Tesla. Shares are in the nosebleed section and wouldn't pay anywhere close to what they are going for.
Paolo Sarvia
Paolo Sarvia Sep 04, 2020 10:39AM ET
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... you know what, they throw them down the cliff at the edge of flatheart....
Jeremy Williams
Jeremy Williams Sep 04, 2020 10:39AM ET
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Yes and ive seen lots with thousands of cars just sitting there. Musk is a fabricator of numbers and probably buys them all himself and lets them waste away
Ron Love
Ron Love Sep 04, 2020 8:32AM ET
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Chamath explained why you need to evaluate Tesla on a 2024 or 2025E instead of a yearly in this low bond rate climate.
vipul makani
vipul makani Sep 04, 2020 8:32AM ET
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Bear market territory ? Really
 
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