Why Buying Tesla (TSLA) in Front of Earnings Makes Sense

We, as traders and investors do many things that, when analyzed, are completely irrational, if often understandable. We buy at the top rather than at the bottom because we have an inherent belief in the wisdom of crowds. Our dislike of failure and desire to grab at good things leads us to run losses too long and take profit too soon. When we see evidence that contradicts our assumptions, we ignore it. In the cold light of day we know that all of these things get in the way of what should be our main concern, maximizing return, but we do them anyway.

We are also irrational in other ways, too, such as our tendency to look at returns based on a calendar. It is easy, for example, to look at this month in isolation and say it was a great one for investors. The S&P 500 is up around 10 percent in October, which is a great return on a 1 month basis. When you consider, however, that August saw precipitous declines and September a failed recovery, that 10 percent is less impressive.

One area where looking back on a calendar basis, say 1 month or 3 months, can be useful, however, is in finding stocks that are out of favor and may therefore provide an opportunity. There is nothing magical about the change in month, but most fund managers report on a monthly basis so naturally they are looking for opportunities at the start of each new month. That can lead to quite dramatic corrections when things have got out of line, so looking for stocks that have declined significantly even as the market has gained can pay off. This month, Tesla (TSLA) certainly fits that description.

Despite this huge discrepancy with the market over the last month, Tesla can hardly be regarded as cheap when measured by conventional metrics. A forward P/E of 94 hardly screams value, but in some ways, TSLA has to be judged differently. The stock has always been about potential and still is, but now the focus is more on “when” profits start to flow rather than “if” they will. It is worry about that timing that has, in part, caused the stock to drop so much this month. Tales of increased competition, particularly of an all electric Porsche, have also contributed.

In both cases, though, it is likely that Tesla CEO Elon Musk will use Tuesday’s earnings release by the company to put investors’ minds at ease. We have already seen the (admittedly delayed) rollout of the Model X SUV. The Model 3, more of an entry level Tesla, will presumably not have the same engineering challenges. One imagines that a cheaper model will have less gizmos and gadgets and so should be relatively simple to keep to a timetable. The biggest thing holding it back, though, will be battery availability, and an announcement on that front is what could spark a serious rally in the stock.

As you may have heard, Tesla’s “gigafactory”, where they will manufacture their own batteries is, according to the company website, scheduled to open in 2017. There have, however, been multiple reports that it could be completed next year. If that were the case it would not just pave the way for the more “mass production” Model 3 but also give Tesla a huge advantage, both in terms of cost and consistency of supply, over competitors such as Porsche. Whatever the actual earnings, therefore, it will be news about the factory that will move the stock.

It should be kept in mind that, whatever some people’s criticisms of Elon Musk, one thing that he has been consistently good at is protecting Tesla’s stock price. No period of weakness lasts too long before good news is released, and released in such a way as to have an effect. He is a master at brand building. Think about it - when you read “gigafactory” above you knew exactly to what I was referring. If anybody other than Tesla planned that facility, it would just be a big battery plant. For Tesla, however, it is a “gigafactory” with all the sexy, spectacular, techy stuff that that implies.

There are, from a long term perspective, things to worry about when it comes to TSLA. Will the Model 3, when it comes, weaken the company’s brand as a luxury car maker? If it is a success, can the charging network, and Tesla’s own Supercharger network in particular, be expanded rapidly enough to cope? Can they actually turn all of that potential into cold, hard cash? These and other questions remain, but they have always been around. Last month’s decline in the stock is really more about one of those illogical “follow the herd” moves than anything new. Given that, and Musk’s record of coming up with positive news when the stock comes under pressure, buying into the earnings on Tuesday with a view to holding on for at least a month or so should be a winning strategy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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