Speculator’s Corner: Is Tesla (TSLA) For Real?

| May 20, 2013 | 0 Comments

If you’ve been following stocks at all recently, then you’ve likely heard of Tesla Motors (TSLA).  It’s the “it” company right now.

Tesla, of course, develops electric vehicles.  The Model S is the company’s only current automobile for sale, but another vehicle (Model X) will be available in 2014.  What makes the Model S unique is the car’s ability to blend luxury and appeal with 100% battery power.  You see, it uses zero gas and has zero emissions.

I’ve visited a Tesla store and seen the Model S first hand.  I have to admit, it’s an amazing car.  I totally understand the buzz behind these impressive vehicles.

But does the buzz justify the stock price?

In case you haven’t seen, TSLA stock has been on an absolute tear lately.  The shares are up 95% over the past month and 170% year-to-date.  Clearly, TSLA’s shareholders are thrilled with the performance.

But here’s the thing…

One of the reasons the stock is flying so high, particularly this past week, is the heavy amount of shorting going on.  At one point, shorts made up 50% of the float.  That’s an enormous short percentage.

As such, we have to assume part of the stock’s explosive run is due to a short squeeze.  Apparently, short sellers believed selling fancy electric cars is not enough to justify the company’s lofty valuation.  (Although, I distinctly remember when short sellers used to pick on Amazon (AMZN) because “all the company does is sell books” – and look what happened there.)

However, TSLA’s latest quarterly earnings were fantastic.  The company beat expectations on revenues, earnings, and margins.  TSLA actually posted a profit of just over $11 million.

It’s impressive for a new company in the ultra-competitive automobile industry to turn a profit so quickly.  Last year at this time, TSLA posted a $90 million loss.

Granted, the company only expects to sell 21,000 cars this year.  We’re not talking about huge numbers – yet.  But, profit is profit.  And so far, the shorts have been wrong.

Not to mention, the Model S recently scored 99 out of 100 on the Consumer Reports test.  That’s the highest score ever from the historically tough graders.

But, once again, does any of this justify TSLA’s sky-high valuation?

The company does have a long way to go to truly compete with the major automobile makers of the world.  Yet, it doesn’t mean the company can’t carve out a profitable niche for itself.

Regarding the current stock price, you definitely have to take the short squeeze into account.  TSLA appears to be a great company, but the price is probably a little too rich at current levels.

In my opinion, the stock will need to consolidate a bit before moving higher at a more reasonable pace.

One way to take advantage of the current situation in TSLA using options is to sell out-of-the-money puts with the intention of taking ownership of the shares.  Keep in mind, this strategy is only for those who have the capital – and the desire – to own 100 shares of TSLA stock or more.

Basically, pick a stock price where you’d feel comfortable owning the shares and sell a put at the strike.  If the shares remain above the strike, you’ll collect the rich premium from the put.  And, if the price drops below your strike, you’ll collect the premium and own the shares at the price you desire.

If fact, if the shares remain inflated, you can keep selling puts below the price until the stock drops to your level.  It’s really a no-lose strategy if you plan on owning the shares at some point, but want to wait to get in on your terms.

Yours in Profit,

Gordon Lewis

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Category: Options Trading

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also one of the key analysts behind the highly successful Options Trading Wire and Advanced Options Adviser. As a market maker on the floor of the CBOE, Gordon analyzed and traded stocks and options across a broad range of market caps and industries including retail, internet, oil, insurance, and telecom. He often traded thousands of options contracts per month… and it’s fair to say, Gordon’s analyzed and invested in some of the most complex and successful options strategies in the world.

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