Tesla (TSLA), it seems, has gone from everybody’s darling to everybody’s whipping boy in a matter of a couple of months. It is a company and a stock that tends to prompt extreme emotions and views, so those that follow it are probably used to this kind of thing, but even so, this shift in perception has been remarkable.
Just a few days ago, I used the stories about a Tesla crashing while on autopilot as an example of why investors should be wary of overreacting to headlines; over the last couple of days, the headlines have become even more negative. There has been extensive coverage of a note to clients from Morgan Stanley that laid out a worst-case scenario.
Here again, investors should be wary of headlines.
When in high school, my eldest son took an elective class in Videography and Television Production. It was not particularly relevant to the college application process, nor did it inspire a career path, but it taught him one of the most important things he learned in school, the concept of “framing” news.
The class was asked to watch coverage of a couple of stories on both Fox News and MSNBC, so they could understand how what aspects of a story were covered and how events were reported could inject an inherent bias into the news. They quickly learned that what aspects of a story were reported and how two very different pictures of the same event could be generated.
In those respects, business news is like political news, and the coverage of what was said by Morgan Stanley’s Adam Jonas is a case in point.
Almost all of the headlines, such as this and this, focused on the most sensational aspect of the piece, the aforementioned worst-case scenario, in which TSLA drops to $10. That is understandable since any headline that includes "Tesla" and "$10" in the same sentence will certainly draw clicks and eyeballs (astute readers will surely have noticed the headline accompanying this piece), but it was only part of the analysis.
Much less coverage was given to other parts of the report, such as where Jonas lays out a bull-case scenario in which TSLA recovers to $391, or the fact that he left his price target unchanged at $230. If you think about it, headlines along the lines of “Morgan Stanley Analyst Lays Out A Bull Case for TSLA that Sees a Nearly 100% Jump!” would be just as valid as those we actually saw.
That, however, would not fit the current mood.
The mood is pretty ugly. TSLA has lost well over forty percent since the middle of December. To some extent, that big drop is understandable considering missed delivery targets, the potential impact of an extended trade war with China and swinging back to a loss last quarter. At this point, though, at least from a trader’s perspective, there are two clear signs that it is overdone.
The first is that everybody is now jumping on the bear bandwagon. Apart from the (presumably deliberate) sensational nature of the $10 “call,” what made Jonas’ report significant was that until now he has been a notable bull on the stock. Nor is he alone in giving up; there have been several reports of big funds that have exited their long positions, and other analysts who have shifted to a negative view.
As counterintuitive as it may seem, however, to a trader that is a good sign. Turnarounds of momentum-driven moves tend to start shortly after the last few holdouts are squeezed out, and we seem to be at that point with TSLA. That squeeze could now be over and the next one is likely to be in the other direction.
Some of TSLA’s decline is undoubtedly down to some very real concerns about the company, but a large part is also down to aggressive short selling, as Bank of America said this morning. At this point, over thirty percent of the share float is held short. That sets up a classic short squeeze, where the price is driven up, resulting in margin calls that force the shorts to cover, driving the price higher, etc.
The chances of that coming soon are increased by the fact that, even as the torrent of negative coverage has hit, TSLA’s move down has stalled at around $200.
As frustrating as it is to some people, the rise in TSLA over the last few years has been about the products and potential of the company, not its performance, and nothing about that has really changed. What has changed though is the media coverage, and the almost uniformly negative framing of that coverage suggests a bounce is coming soon.