Feeling FOMO over Tesla’s (Tesla Stock Quote, Chart, News NASDAQ:TSLA) mammoth run? While getting anxious about missing out on those lofty gains is understandable, an investor’s best reaction in situations like these is to wait it out, says portfolio manager Keith Richards, who argues that an opportune time to jump in could be just around the corner.
What a difference a year makes. A few short months ago, the knives were certainly out for Tesla, with talking heads from here to Detroit predicting doom for the company.
Tesla’s disappointing production numbers were a problem, as were the dismal expectations for profitability, both of which got passed off as sure signs of a pretender in the automaker game.
Then there was the hand-wringing over Elon Musk, the loose cannon of a CEO who, the wisdom went, would be better off sticking to space rockets than trying to evolve the car industry.
And the market clearly reflected this pessimism, with Tesla’s share price spending the first half of 2019 in serious free fall, losing half of its value in the process and causing speculation that a takeout could be on order.
“There’s no real rule of thumb but there will be a probable correction at some point because the stock is overbought.”
But then came Tesla’s third quarter earnings in October, where the automaker posted revenue in line with expectations and a surprise profit. Tesla had adjusted earnings of $342 million or $1.91 per share, a whole lot better than the loss of $0.46 per share that analysts had been expecting. (All figures in US dollars.)
Sentiment continued to grow in Tesla’s favour over the fall and came to a head earlier this month when management announced its fourth quarter delivery numbers: 112,000 vehicles, which was above expectations and enough for the carmaker to touch the low end of its 2019 guidance.
The big investment banks then followed up by raising their 12-month targets on Tesla stock. As an example, last week, Oppenheimer analyst Colin Rusch gave a $612 per share target, proclaiming that Tesla was truly the industry disruptor it claimed to be.
“We believe the company’s risk tolerance, ability to implement learnings from past errors, and larger ambition than peers are beginning to pose an existential threat to transportation companies that are unable or unwilling to innovate at a faster pace,” said Rusch.
All told, Tesla’s share price reached as high as $547 last week before settling back into the low $500s. The mercurial rise should be enough to cause investors to wonder why they’re on the outside looking in. But more importantly, they should be asking this question: what has happened to parabolic stocks in the past and how much of those gains are typically retraced?
Richards, president and chief portfolio manager at ValueTrend Wealth Management, spoke to BNN Bloomberg on the topic last Thursday, saying there’s a virtue in patience at times like these.
“[Tesla] has just gone completely parabolic and what’s the history on this? A person who was one of my mentors in technical analysis did a big study on stocks that have gone like this and how much they retraced. The average retracement is about half of when the move became parabolic,” Richards said.
“So, if you want to call [Tesla’s] parabolic move as starting in the low $300s to current which is $500 — could it correct $100?” he said. “There’s no real rule of thumb but there will be a probable correction at some point because the stock is overbought.”
“[But] when it stops going down and when it starts consolidating after a correction, that’s when you buy it,” Richards said.