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The investor outlook on an issue can be favorable for a long time, but when the sentiment turns, it can be ruthless. This scenario is best exemplified by the recent price action in Tesla Inc (NASDAQ:TSLA), which is the PreMarket Prep Stock of the Day.
Tesla's Glory Days: Who can forget when Tesla's addition to the S&P 500 index was announced in November 2020, which came on the hees of a 5-to-1 stock split. It seemed Tesla would never stop going up.
By being added to the index as it ramped for its monster rally in 2021, index arbitrageurs had no choice but to buy shares in order to keep their portfolios in line.
As a result, the issue made its all-time high in November 2021 at $414.50, just ahead of the index making its top in early January.
Valuation Matters: “Valuation does not matter until it matters" was familiar saying on the PreMarket Prep show throughout 2021 as issues traded to outrageous levels.
If there is one lesson investors should have learned from this year's price action, it's that price/earning ratios do matter in the long run.
Tesla Left Out In The Cold: Putting aside Musk’s ill-fated purchase of Twitter, Tesla is now being treated like so many other growth technology issues that have been clobbered.
The main reason: the rising interest rate environment has instigated a seismic shift in investor sentiment toward companies that make money and have reasonable valuations.
This is evidenced by Tesla's recent price action. Whereas the S&P 500 bottomed in October and has rallied 13% of that low, Tesla went on to make a new two-year low in November at $166.19, $32 beyond its October low. More concerning is that the issue came within $3 of that low earlier in Thursday’s session.
Tesla News Flow Turns Ugly: It seems now almost on a daily basis that Tesla on the wrong end of the news flow. The most recent is that the bankers financing Musk's deal with Twitter are considering providing new margin loans backed by Tesla stock to replace some of the high-interest debt on his Twitter deal.
In other words, Musk’s ownership would become more diluted, as it would for all other Tesla stock owners.
In addition, it was reported the automaker is considering cutting back on production and reducing staff.
PreMarket Prep's Take: Regardless of the news, the issue with Tesla stock is multiple contractions, said PreMarket Prep co-host Dennis Dick.
“The days of buying companies that are trading 75 to 100 times forward earnings is over,” he said.
Dick predicts Tesla will someday come down to a reasonable valuation, even 30 or 40, and then it may be a “buy.”
The author of this article alerted inventors to buyers lurking under $170 in premarket trading.
TSLA Price Action: After a lower opening price ($171.91 vs. $174.04), the issue bottomed in the first 30 minutes of the session at $169.06 and reversed course. It rebounded but found resistance just above Wednesday’s closing price ($174.04) at $175.20 and as of 2:40 p.m. EST is trading actively in the $173 handle.
The Tesla discussion from Thursday’s show can be found here:
Photo via Shutterstock.
Posted In: TSLA
