2017 Investor Roundtable: TSLA Market Action

[MXWing]

I couldn't agree more with this.

Add me to the agree list.

However, can I stay solvent longer than the market will remain irrational?

We need more concrete tweets from Elon rather than 50 shades of grey floors!!!!

 

[Starno]

If I remember correctly, before the M3 reveal there was still some uncertainty if Tesla will actually have car(s) to show, or maybe just PPT slides and sketches. I think Elon even joked about it at the beginning of the event. I think that added to the stock PPS rise in April 2016. But then the reservation # came out and people speculated that Tesla will have to raise more money to accelerate the production ramp, and it will look bad for the short term balance sheet, and the PPS dropped again.

I'd like to think what the market is forecasting for M3 production, it's possible that the market is expecting a few hundred cars, and it is what Tesla delivers. I think the extremes are well known, if Tesla delivers ~10 cars at the end of July, people will say "oh MX all over again", and the PPS will tank. If Tesla rolls out 1000 cars from a warehouse, of course the PPS will shoot through the roof. Anyone can predict those outcome. What's likely is a middle of the road rollout. What happens if Tesla rolls out 200 cars, but doesn't give more details on when/how many will come after that. I really have no idea how the market will react.

I think anything that shows Tesla is within schedule will shoot the SP through the roof.

When first M3's will be on the road, first reviews coming out, ... it's gonna be crazy.

 

[adiggs]

Then when should you sell? You shouldn't sell when it drops, I've already made the mistake of selling as it's still climbing. At what point are you comfortable with selling your shares? In a perfect world, you'd sell at its peak, but that's practically impossible to predict.

You buy with an investment plan / hypothesis, and you sell when that investment plan / hypothesis has played out. Or you sell when the company behavior, business model, or other critical factor of your original plan changes in a way that makes the original hypothesis invalid.

But that's a really long term view of things, and doesn't work for money that you need to do something with (at least not in a reliable way) in the next few hours / days / weeks / months.

For me, that investment plan / hypothesis is measured in decades, is monitored regularly (because I like reading about Tesla and the markets it's disrupting), and gets a more serious revisit now and then based on the product cycle. My next serious reevaluation of the company is far enough into the Model 3 release that it's high volume and we're beginning to understand its impact on the market. Maybe more tangibly, we're far enough into the Model 3 release that one can reasonably custom order a Model 3 and expect to get it in a few months. I'm think 2019 when today's normal of S/X are high volume and have some history, when it'll be S/X/3 are high volume and have history.

(Note the complete lack of "high" and "low" )

 

[BornToFly]

I have a hard time believing that the SP won't go up tomorrow, with Q2 delivery numbers coming out Monday. But maybe the market will wait until Monday for the fireworks....

 

[Jayjs20]

@Starno
@adiggs


The issue with that is that, I don't think Elon Musk is ever going to stop. You start off with the roadster, then the S, the X, the 3, then you have the semi, the Y, tesla network, solar panels/roof, home batteries. There will always be more projects waiting to happen and more projects announced, which means the SP will never reach its potential, which means you should never sell.

That creates a problem for people heavily into margins. It's not 'if' I'll hit a margin call, it's 'when'. Maybe I'll take a second look into leaps.

 

[neroden]

Repost from two weeks ago today (#10823),


"Market drops of 20% or more are not at all uncommon. We haven't had one for over 8 years... my understanding is that we have now moved into record territory for time since the last such drop compared tot the last 120 years (not saying this means some mechanical fated drop in the next few months, but, it's very unlikely we won't have at least one 20% drop or worse in the markets before the mid-next decade, a timeframe many of us use with Tesla). Drops of 30%, 40%, 50+% happen (wasn't the '08 drop more than 33%?). Tesla being a stock that has soared, would likely drop more than the market if we get to something in the 20+% range for the market. While I'm highly confident all of this would be temporary, that would be of little help to someone forced out of their position with a margin call."

Points which may be of interest: TSLA usually doesn't correlate well with the market. The "beta" for TSLA is kind of meaningless (though by the way, it's almost exactly 1), because the R^2 is very low. So I wouldn't be surprised if TSLA goes up in a bear market or down in a bull market.

An article from 2014 found that TSLA had only 10.49% correlation (R^2) with the S&P 500:
How Tesla Motors Conforms To A 'Low R-Squared' Investing Philosophy - Tesla Motors (NASDAQ:TSLA) | Seeking Alpha

I haven't found up to date information, but I suspect it's still a very low correlation. This causes beta calculations to be meaningless (and to tend towards 1).

(Update: the correlation seems to be higher now but is still extremely weak compared to most stocks:
TSLA correlation report - daily rankings of positive and negative correlated stocks. And a daily list of non-correlated stocks to TSLA.

Looks like a 20% correlation to the broader market. The stocks with the strongest correlation to TSLA are a pretty weird group, but still have pretty low correlation with TSLA.)


That said, TSLA is very definitely highly volatile. So the same rules apply to TSLA as would apply to an entire volatile market. TSLA is perfectly likely to have a 20% (or 30%) drop *all on its own*, just like the market is. You could be watching the NASDAQ go up and be facing a margin call on TSLA due to a 20% drop if you're not careful.

 

[neroden]

I feel like a total fool. It came up in my Google finance feed and lined up perfectly with the reversal back to 360. My bad.

You know, it's documented that bots read the Google Finance news feed (and the Yahoo one, and others) and mindlessly trade on the articles without checking the dates... so you could actually be right, that article could have caused a dip.

I am not fond of program trading. I think it just creates volatility. At the moment I am profiting off volatility, but still.

 

[adiggs]

@Starno
@adiggs


The issue with that is that, I don't think Elon Musk is ever going to stop. You start off with the roadster, then the S, the X, the 3, then you have the semi, the Y, tesla network, solar panels/roof, home batteries. There will always be more projects waiting to happen and more projects announced, which means the SP will never reach its potential, which means you should never sell.

That creates a problem for people heavily into margins. It's not 'if' I'll hit a margin call, it's 'when'. Maybe I'll take a second look into leaps.

Fair enough.

Though I do have access to margin in my brokerage account, I don't use it. And I don't use options to create extra leverage.

So if what you say happens, and frankly I expect you're right, then I will gladly and happily own TSLA in at least the quantity I own it today for the rest of my life. The next owners of me and my wife's shares may well be the charity we leave them to.

For me at least, I've taken to heart the idea that the market can remain irrational far longer than I can remain solvent. I don't want to be in a position where I'm right (idea) but wrong (timing) and see my retirement impacted. I'm also well enough set that I don't need to use leverage in order to create financial independence, nor do I have any particular compulsion to make and spend every dime I can. I like reading about business, markets, technology, more than I do making money (maybe I'm weird that way).


I think you're right that Musk will never stop. That may or may not mean that I stay on the merry-go-round though. My guess right now is clear line of sight for another 10 years, and a good chance at 30+ years.


Buffett likes to say - if you had 20 tickets for trading during your whole life, how would that alter your approach to trading? You wouldn't day-trade, like ever, because you'd use up all your tickets and be done in less than a month (with a whole lifetime still to live). You would study a small number of companies obsessively and when you see a gross market mispricing of a company (such as I see with TSLA today, just as I saw 4 years ago), then you'd buy as much of it as you could stand and you'd keep it forever* (until it stopped being such a great business). You'd buy the business, not the stock.


Worth noting that it would be really convenient for me if Tesla were to find itself with too much cash to responsibly reinvest into the business in 5-10 years, and start paying dividends then. Not essential, but really convenient.

 

[MitchJi]

Having lived through the event as well, I think the uncertainty (and accompanying hype) is what caused the post-reveal reaction in this case. A lot of people, for some stupid reason, were expecting Model 3 to be revealed. I know the forums pretty much had it pegged, but the market did not. M3 reveal is different to me. I think we, and the market, have a pretty good idea of what will be revealed. I also believe the market is underforecasting production, which is why I am aggressively positioned. Unfortunately, macro will do what it will.

According the Elon Tesla expects the demand to go up substantially after a final reveal, when Tesla reveals the final features and prices. In other words it's going to be better than the expectations.

I think anything that shows Tesla is within schedule will shoot the SP through the roof.

When first M3's will be on the road, first reviews coming out, ... it's gonna be crazy.

I agree. The potential problem is what happens if there is a small or a big miss. All it would take is one large storm that prevents a few parts from arriving on time.

 

[neroden]

Then when should you sell? You shouldn't sell when it drops, I've already made the mistake of selling as it's still climbing. At what point are you comfortable with selling your shares?

OK, as someone who's been an investor for a long time, I can give you some old-fashioned views on this. As a long-termer, there are two times when you sell.

(1) You sell when your view of the company changes: when your thesis for why it's a good investment goes away. So, some hypotheticals which might happen a decade or more from now:
-- you drive the new Geely electric car (soon to have millions produced per year at a low retail price), are blown away, and think "This is better than Tesla"
-- you decide that Tesla has no more room to grow its business because it already dominates all its business segments, has no new business segments to move into which you think it is competent at, and its P/E is still way above market average
-- Musk dies and his replacement seems incompetent
-- Someone mass-produces a battery design which is blatantly better and cheaper than anything Tesla makes by a large margin
-- Tesla is surrounded by thousands of lawsuits for "Autopilot deaths" which are *actually Tesla's fault* and meanwhile a competitor has a perfectly functioning Autopilot
-- Musk announces that the entire company budget will now go to promoting oil drilling
-- After careful analysis, you conclude that the company is probably actually lying to you (not just downplaying trouble or accounting incompetently, but actually committing fraud) and that it's material
-- Teleportation is perfected

None of these seem particularly likely, but my point is, stuff like these are all "sell" signals. I've seen stuff almost this weird at other companies. You sell when your *thesis* about the stock has been invalidated, due to new information.

I'll give you a historic example of a thesis being invalidated. I owned Exxon stock. The thesis goes as follows: Demand for oil will keep going up because there are no cheaper substitutes; Exxon can continue to find cheap oil by exploration; therefore Exxon will continue to profit (and you can basically calculate the profits from the demand assumptions and the supply costs). This was invalidated in two parts: electric cars are cheaper to operate than gasoline cars, putting a cap on oil demand at high oil prices; and despite spending bililons on exploration, Exxon simply stopped finding cheap oil in 2008. (There was an alternative thesis: Exxon could have continued to profit by abandoning exploration and simply pumping old wells, but my analysis of their behavior said that they *would choose not to do this*.) To be very clear about this, my family had held some of this Exxon stock since the 1950s when it was Standard Oil of New Jersey. So it can be a long time before you sell!

There is one more common and slightly subtle variant of this reason to sell:
-- you have lost interest in Tesla to the point where you aren't paying attention to the company and wouldn't really notice if something went horribly wrong which invalidated your thesis. Maybe you're just too busy working at your job, or you now live full-time in a place where cars are banned (or on a ship, or a remote scientific research station) -- and you just aren't following Tesla enough to be able to evaluate it any more.

This has actually been my main reason for selling most stocks. "Drat, I haven't been paying attention to that stock for the last few years. And... I know I'm not going to. Time to get out."

(2) You sell when you need to spend the money. On something else. This one kind of goes without saying, right? You try to sell at a local high but when you need the money you need the money, and you sell.

----
Those who are more aggressive seekers of profit would add a third reason:
(3) You sell when you see a clearly better investment opportunity.

I actually don't usually do that.

 

[geneclean55]

I wonder how far in advance Elon will give a heads up for the reveal/delivery date? And how late the market is prepared to give him on that 'heads up'

 

[neroden]

Max-pain should be favorable for tmrw if that website is up to date. Could be low volume trading in the afternoon with the long weekend ahead.

Quarterlies as well... so decent money at stake.

Yeah, isn't that interesting? Max pain should be an upwards tractor beam tomorrow.

Then, weekend -- I think we're all guessing that Q2 deliveries will be released, but they might not.

Monday, probably reaction to Q2 deliveries, probably thin trading due to the holiday weekend...

... and then the market is closed again on Tuesday for Independence Day.

Should be chaotic and volatile! We might get a better sense of the trend for the first half of July after next Wednesday and Thursday.

 

[bdy0627]

went ahead and pulled up the stock price with these events,

10/1/2014 TSLA closes at $235.65 and after market closes, Elon tweets "About time to unveil the D and something else" with a photo that announces the event will be 10/9

10/92014 high of day $265.54 (up 12.7% from 10/1 close)

10/15/2014 low of day $217.32 (down 18.2% from 10/9 high of the day)

having lived through this in real time, 1) there were not other substantial catalysts for these stock price movements, 2) Elon made us wait a long time that night... but, what he showed us, dual motor and autopilot was a very very positive presentation. For me what Tesla showed the world that night was the second most moving moment telling me this company has a tremendous future. Emotions were saying, "we're going up tomorrow."

Again, I write this not to say the Model 3 reveal, ramp, etc. will lead to a selloff... maybe it goes up strongly with these. My point is, I think we have a far far more meaningful opportunity to evaluate whether Tesla is undervalued for where it is headed long-term, than figuring out whether the market already ran past what it will bid TSLA to based on the 3 reveal event, or has just gotten started bidding the price up on it.

I checked out what the Nasdaq was doing over this timeframe as well. Here are the daily closing prices (QQQ):

10/1/2014 closes at $94.37

10/9/2014 closes at $94.03 (down .36% from 10/1 close)

10/15/2014 closes at $89.67 (down 4.6% from 10/9 close)

So TSLA diverged way up from a flat market after Elon's announcement until the day the news was revealed. There were 6 trading days and it rose for the first 3 after the announcement. TSLA then followed the market down in a greatly exaggerated fashion (as it often does).

We do not know when the announcement will happen but it is virtually certain to happen prior to the last week of July. That leaves just a few weeks for it to happen. We do not know how big of a jump there will be but it seems probable that there will be a substantial rise in the stock from the announcement of the actual reveal date over at least several days. The amount of the rise will partly depend upon the market, as will the effect after the rise. It seems to me to be a good trading opportunity but it would be nice to capture that first jump, as that represented roughly half of the rise previously. On the other hand, it would be safer given the current state of the market, to wait and jump in immediately after the announcement, even if you missed about half of the rise.

For the experienced short term option traders, what would be the better call options to use for a short term move like this, assuming roughly a 10% rise over a few days? July 28 or Aug 4, $360 strike? Those look pretty good to me but I'm not sure. July 28 may be cutting it too close. No sense going too far out since you will be paying a lot for time premium you don't plan to use. I'm guessing a rise to approximately $400 but that obviously depends upon what happens to the stock prior to the announcement.

 

[neroden]

Yes, you and Crowded Mind are remembering well. It's hard to know how much the silly suggestions were part of the rise and fall. I think it was more traders playing on momentum than the market collectively believing the silliness, but, neither take is provable as far as I can tell.

Here's another example,

March 2012 TSLA peaks at $39.95, not to be surpassed until February 2013. Stock hit a low in August 2012 of $25.52. Model S first delivery event was in June 2012 (fwiw, did a quick check using QQQ as a proxy, TSLA was not moving in tandem with the markets)

Again, not saying we will go down with M3 reveal, but, rather, that it is unpredictable to me.

Interesting to look back at this stuff.

I still think the markets will react substantially to actual reported GAAP profits, or at least to two consecutive quarters thereof, which I am predicting sometime in 2018. I honestly have no idea before then; I thought the stock was going to hang out in the low $200s until this coming September, which was obviously wrong!

 

[neroden]

I don't think they know any more than we do. I'm going to make an immediate guess that they're wrong about colors, because it is insane not to sell a car in white, which is literally the most popular color for cars in the world (and also in the US). It's most popular by a substantial margin, too:

Car colour popularity - Wikipedia

If you think about it, the cancellation of plain white (making "pearl white" the only option) on Model S was effectively a method of increasing the price for 22% of buyers. Sneaky.

 

[bdy0627]

According the Elon Tesla expects the demand to go up substantially after a final reveal, when Tesla reveals the final features and prices. In other words it's going to be better than the expectations.

I agree. The potential problem is what happens if there is a small or a big miss. All it would take is one large storm that prevents a few parts from arriving on time.

I could be wrong here, but I'm expecting the reveal to be totally separate from the production ramp, with separate effects on the stock. With the reveal, we get to see the finished product but nothing in significant volume for several months, until they start selling M3 to the public. Until then, I don't believe there will be a ramp effect on the share price. Even if earlier than expected, that's likely October at the earliest.

 

[myusername]

OK, as someone who's been an investor for a long time, I can give you some old-fashioned views on this. As a long-termer, there are two times when you sell.

(1) You sell when your view of the company changes: when your thesis for why it's a good investment goes away. So, some hypotheticals which might happen a decade or more from now:
-- you drive the new Geely electric car (soon to have millions produced per year at a low retail price), are blown away, and think "This is better than Tesla"
-- you decide that Tesla has no more room to grow its business because it already dominates all its business segments, has no new business segments to move into which you think it is competent at, and its P/E is still way above market average
-- Musk dies and his replacement seems incompetent
-- Someone mass-produces a battery design which is blatantly better and cheaper than anything Tesla makes by a large margin
-- Tesla is surrounded by thousands of lawsuits for "Autopilot deaths" which are *actually Tesla's fault* and meanwhile a competitor has a perfectly functioning Autopilot
-- Musk announces that the entire company budget will now go to promoting oil drilling
-- After careful analysis, you conclude that the company is probably actually lying to you (not just downplaying trouble or accounting incompetently, but actually committing fraud) and that it's material
-- Teleportation is perfected

None of these seem particularly likely, but my point is, stuff like these are all "sell" signals. I've seen stuff almost this weird at other companies. You sell when your *thesis* about the stock has been invalidated, due to new information.

I'll give you a historic example of a thesis being invalidated. I owned Exxon stock. The thesis goes as follows: Demand for oil will keep going up because there are no cheaper substitutes; Exxon can continue to find cheap oil by exploration; therefore Exxon will continue to profit (and you can basically calculate the profits from the demand assumptions and the supply costs). This was invalidated in two parts: electric cars are cheaper to operate than gasoline cars, putting a cap on oil demand at high oil prices; and despite spending bililons on exploration, Exxon simply stopped finding cheap oil in 2008. (There was an alternative thesis: Exxon could have continued to profit by abandoning exploration and simply pumping old wells, but my analysis of their behavior said that they *would choose not to do this*.) To be very clear about this, my family had held some of this Exxon stock since the 1950s when it was Standard Oil of New Jersey. So it can be a long time before you sell!

There is one more common and slightly subtle variant of this reason to sell:
-- you have lost interest in Tesla to the point where you aren't paying attention to the company and wouldn't really notice if something went horribly wrong which invalidated your thesis. Maybe you're just too busy working at your job, or you now live full-time in a place where cars are banned (or on a ship, or a remote scientific research station) -- and you just aren't following Tesla enough to be able to evaluate it any more.

This has actually been my main reason for selling most stocks. "Drat, I haven't been paying attention to that stock for the last few years. And... I know I'm not going to. Time to get out."

(2) You sell when you need to spend the money. On something else. This one kind of goes without saying, right? You try to sell at a local high but when you need the money you need the money, and you sell.

----
Those who are more aggressive seekers of profit would add a third reason:
(3) You sell when you see a clearly better investment opportunity.

I actually don't usually do that.

4) the stock has outpaced the company and is valued with irrational disregard to risk for too many years out

EDIT:

"TSLA stock is up nearly 75% over the past year, and each car TSLA sold in 2016 accounted for $800,000 in market cap. For BMW, this figure was only $25,000."

Buy Tesla? Try Undervalued BMW Instead (BMWYY)

 

[madodel]

Then when should you sell? You shouldn't sell when it drops, I've already made the mistake of selling as it's still climbing. At what point are you comfortable with selling your shares? In a perfect world, you'd sell at its peak, but that's practically impossible to predict.

Depends on what you are investing for, but to sell just because the market itself is collapsing is a really bad idea unless you can't afford to keep your investments. I don't use margin and at least for now I have enough other income to leave my investments alone even when the market is dicey. It hurts to see the value of everything drop, but everyone is suffering. When the market bottoms it is an amazing buying opportunity. Now if TSLA itself all of a sudden hits a brick wall then I will evaluate based on that and sell before it it goes below my investment cost. When I was a neophyte I would hold until a stock was pretty much worthless which was stupid. But I learned. I just don't see TSLA being worthless, at least not in my remaining lifetime.

I look at the company. I use to be very long IBM over a couple decades ago, but when IBM changed from a computer company to a service company I soured on them and unloaded what I had and invested in AAPL. IBM has certainly done OK since but AAPL has done beyond my wildest imagination. Hopefully we see the same from TSLA. Certainly has been a fun ride up from the 30's for me. My investment timeframe is super long so I will hold as long as I believe in the company, which I do in Tesla. Less so now of AAPL, but I hold it because it is reasonably stable now and I make more in dividends a year than what my initial investment cost.

 

[Curt Renz]

I don't think they know any more than we do. I'm going to make an immediate guess that they're wrong about colors, because it is insane not to sell a car in white, which is literally the most popular color for cars in the world (and also in the US). It's most popular by a substantial margin, too:

Car colour popularity - Wikipedia

If you think about it, the cancellation of plain white (making "pearl white" the only option) on Model S was effectively a method of increasing the price for 22% of buyers. Sneaky.

Elon said their will be a gift for those who stood in queues at stores to reserve Model 3's. Perhaps it will be Signature White.

 

[22522]

4) the stock has outpaced the company and is valued with irrational disregard to risk for too many years out

If people like what Elon is doing and want to help fund that, that is kind of what stock is for.

I think people know that the stock price has outpaced company value, but would rather have their money directed by Elon than Tim or Jeff or Bill?

If you get a return that matches the S&P, and makes the change you want to see happen, then some people would own Tesla stock. I expect it to outperform any other place I could put it with less actual risk. The capital is applied to serve society.