Tesla (TSLA) shares are down about 15% in the last month. However, over the last year or so, a modest pullback like this has signaled a cooling off before the next leg up for TSLA stock.
First, it’s important to acknowledge some of the causes for the slump in TSLA stock lately:
Foremost in many investors’ minds is direct sales. The electric vehicle manufacturer’s unique direct sales model — sans dealers — came under fire this year as as New Jersey banned TSLA sales, joining similar efforts in Texas and Arizona.
But as I wrote a few weeks ago, a focus on this news misses the point. It is increasingly clear that sentiment is much more of the story than these headlines.
In mid-February, Tesla gapped up from about $175 to $250 — more than 40% — in a matter of weeks on strong earnings. Since then, shares have quickly given back 15% and shares are creeping toward $200.
Consider that at the end of February, short interest in TSLA stock was about 31.3 million shares, just a hair shy of the high of 31.6 million shares held short at the end of December 2013. That’s about 37% of the 84.5 million Tesla shares that trade unrestricted on the open market.
And turns out that, across the month of March, the bears have been driving Tesla.
So the only question TSLA stock investors need to ask themselves is whether sentiment has turned over for good, or whether the bulls can retain the upper hand as they have repeatedly in the past year.
I think they might be able to do it. Here’s why:
- The Ohio Automobile Dealers Association has reached a compromise with Tesla Motors, allowing it to operate three stores in the state. As I said above, I think this spat is a non-issue for Tesla’s short-term price, but the optics of this undoubtedly will help sentiment in TSLA stock.
- Don’t forget its most recent earnings were good … really good. The company beat expectations for Q4 and is projected to ramp up production 55% above last year with a total of 35,000 vehicles forecast for delivery in 2014. And the kicker? TSLA saw average selling prices roughly 10% higher than expected.
- Look around. Do you see a lot of options for growth? While the earnings multiple for TSLA stock gets roundly mocked by critics, the fact of the matter is that investors are paying a big premium for growth because there simply ain’t a lot of growth out there.
I’ve said it before and I’ll say it again: I think Tesla stock is fodder for speculation and swing-traders right now, and is a highly volatile play.
But sentiment seems to be shifting back in favor of the bulls after this pause.
Sure, a bad headline or two could gut TSLA stock and change the game. But right now I think this dip is giving investors a decent opportunity to hop in and make a few more bucks.
Just be self-aware if you’re trading Tesla, and understand you’re taking the tiger by the tail here.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.