The Forces Behind Tesla's Wild Ride
It's earnings season... Tesla's crazy, short round trip... The forces behind Tesla's wild ride... The 'ultimate cult stock'... More winners from Doc Eifrig... Does this smell like the 'Melt Up'?
It's the most wonderful time of the year...
It's earnings season.
That means a lot of quarterly reports and the latest numbers from the companies under U.S. Securities and Exchange Commission regulation... which means a lot of chances for more volatility... which, as you'll see in today's Digest, can be good or bad for investors.
On that note, we have good news to report today on a couple of trades that our colleague Dr. David "Doc" Eifrig has recently recommended and closed in one of his services.
But first, we can't go into the weekend without at least acknowledging the wild ride that shares of electric-car maker Tesla (TSLA) took this week...
Tesla was up 20% on Monday – and then down 17% on Wednesday...
Talk about a crazy, short round trip.
Obviously, nothing changed fundamentally with the company in such a brief stretch. And as of earlier today, the volatility appears to have subsided.
But this is one of the wildest swings you'll ever see in the stock market...
Tesla was up nearly 60% in the six trading days ending on Tuesday. Most observers attributed the move to a better-than-expected earnings report last week.
However, better-than-expected earnings reports happen all the time... And the positive numbers that the company reported don't seem to justify such a wild, parabolic move. Nor do they explain the double-digit plunge right after that.
Tesla's reported $105 million in net income for the fourth quarter of 2019 was due entirely to the sale of $133 million in government-issued tax credits. The company continues to lose money on every car it sells.
Elon Musk, the company's lightning-rod CEO and well-documented social-media rambler, couldn't even seem to find reason to boast about the stock's rapid rise on Twitter. And he certainly didn't mention anything about its drop.
So what the heck happened?
Well, frankly... no one seems to know how to explain it.
For starters, we turn to Bloomberg columnist Matt Levine. Yesterday, he penned what might be one of the best takes from the eyes of Wall Street and the financial media... and what seems to be the consensus opinion. As Levine wrote...
I feel bad that I have absolutely no idea what to tell you about what just happened with Tesla Inc., but the good news, for me, is that no one else has any idea either. Morgan Stanley, for instance, doesn't:
Morgan Stanley analyst Adam Jonas said that "many investors are struggling to identify a strong fundamental underpinning for the move."
The brokerage doesn't have the answers to investor queries on who is buying the stock, how high can it go or where there might be support, Jonas wrote in a report to clients Wednesday. ... "Folks are asking a lot of questions," Jonas said.
But here at the Digest, we want answers. Or at the very least, a few ideas to think about...
For that, we've been following our colleague and Empire Financial Research founder Whitney Tilson...
We don't know many people who track Tesla more closely than Whitney. Even before he launched Empire Financial Research last spring, Whitney had been writing regular Tesla-specific e-mails with news and analysis about the company for years.
Whitney has also been vocal with his calls about Tesla shares... the company's underlying value (or lack thereof)... and Musk's "mad genius" approach. Whitney addressed all of these points in detail in his free Empire Financial Daily e-letter earlier today.
In this morning's e-mail, Whitney's Empire Stock Investor co-editor Enrique Abeyta also gave a fresh, in-depth take on Tesla...
Enrique compared the company's position in the electric-vehicle ("EV") and self-driving, autonomous vehicle ("AV") markets to e-commerce giant Amazon's (AMZN) place in the early days of the Internet. As Enrique explained...
Many investors and pundits are saying that they have never seen anything like the price action in Tesla's stock.
We have, though... Think back to the dot-com bubble, which ran from the mid-1990s through the peak in March 2000 and then subsequently crashed the market.
In the essay, Whitney and Enrique also detailed the influence of short-sellers and called Tesla 'the ultimate cult stock'...
Whitney said he suspects that two-thirds of Tesla's stock is "owned by people who will never sell," almost irrespective of how high the price goes. As he put it...
Having so much stock effectively out of the market means that relatively small increases in demand for the stock – much less the huge increases we've seen recently – has an outsized impact on the share price...
We don't want to heap too much blame for Tesla's surge on millennials. But as it turns out, at least a few of them were especially hot for the company as its stock kept rising...
This week, traders on SoFi Invest – a stock-trading platform used mostly by millennials aged 25 to 40 – bought 20 times more Tesla stock than is usually traded on the platform.
If you want to read the entire Empire Financial Daily essay, you can do so right here.
And for more great research from Whitney and Enrique, be sure to check out their Empire Stock Investor newsletter. Right now, you can try it for one year for only $49. Click here to get started.
Meanwhile, Stansberry's Big Trade editor Bill McGilton made a good call on Tesla...
Last August, he told subscribers to sell their short position in Tesla for a 23% gain.
At the time, the trade had five months left until expiration (in January 2020). But Bill showed tremendous foresight, noting at the time that the stock "looks like it's growing immune to the bad news surrounding it."
Like Enrique, Bill said the company's price movement reminds him of the way stocks used to trade during the Internet bubble. As he explained in an e-mail earlier today...
We're talking about a $36 billion move from one day to the next. That's more than Ford's entire market cap of $32 billion.
Finally, we were curious about the potential volatility in Tesla going forward...
So we checked in with Jeff Havenstein, an analyst on Doc's research team.
As one of the analysts for Doc's Advanced Options and Retirement Trader services, Jeff researches and writes about volatility all the time, including moves in and around earnings season. And he shared a few insightful numbers with us about Tesla...
Today, the "implied volatility" on Tesla's two-month call options is around 83%. According to Jeff, that's a "crazy" number after a big spike from around 55% at the start of this month – and from a low of 40% in November.
Implied volatility is an important measure of risk. As Doc and his team explained in a recent issue of their Retirement Trader advisory...
In options lingo, this expected volatility is called "implied volatility." (We [determine this] by using the option price and a standard option pricing model to figure out what volatility other option investors expect.)
For our new readers, implied volatility is synonymous with one standard deviation – or how widely prices are dispersed from the stock's average trading range – and you can see annual implied volatility listed in most trading platforms.
The more volatile the stock, the more expensive the option will be.
So what should everyday investors like us take away from this situation?
Jeff said if you're speculating with Tesla options – or buying puts as a hedge – it's probably a bad bet. They're extremely expensive. And you can spend your money in much better ways...
Specifically, Doc's Advanced Options subscribers have cashed in with other options winners recently...
Most notably, this week, subscribers closed out gains of 26% on Amazon and 80% on social media platform Twitter (TWTR) – companies that both crushed earnings expectations...
Amazon's revenue jumped 21% year over year. And Twitter said it added 7 million "monetizable daily active users" ("mDAUs"), blowing away estimates of 2 million mDAUs. These numbers sent each company's share prices skyrocketing... good news for Doc's subscribers.
Doc recommended a bullish options trade on Amazon in the wake of what many Wall Street analysts felt was a disappointing earnings report last quarter. In that report, the company's earnings fell for the first time in two years. But these folks were misguided, as Doc said in late October...
It's only a matter of time before the market realizes that revenue grew 24% over last year, free cash flow grew 53%, and the decline in income from infrastructure spending [on one-day shipping, the cloud, etc.] is an investment that will pay off in short order.
Amazon has undergone several declines in operating income before – and all of them were opportunities to invest.
Once again, Doc was spot-on.
In its most recent report, Amazon CEO Jeff Bezos specifically credited the strong numbers to his company's Prime one-day and same-day delivery growth – more than quadruple in the fourth quarter of 2019 compared with 2018 – and cloud business growth.
All the more impressive is that at first, this trade didn't go Doc's way... Shares dipped lower at one point and subscribers faced a potential 100% loss. But because of Doc's patience and clear instructions about "rolling" the trade, it ended up as a double-digit winner.
Meanwhile, Doc and his team recommended a bullish trade on Twitter just three weeks ago.
At the time, they wrote that all the attention on the platform during an election year – especially reactions to President Donald Trump's latest tweets – "are going to help Twitter's quarterly results." As Doc wrote in the January 13 issue of Advanced Options...
Twitter has become a cash-generating machine. Like most other tech companies, it has big margins. For every $1 of sales, Twitter has about $0.27 of cash left over (known as free cash flow margin). That's about the same number as Facebook (FB), which is sitting at all-time highs right now...
But Twitter's not getting the love it deserves.
Shares are down about 50% from their all-time high back in late 2013. Meanwhile, the rest of the market can't seem to make anything but new highs.
For all the reasons we stated, we believe shares of Twitter should move higher throughout the year.
Doc and his team were on top of the situations when it was time to lock in gains...
This week, they sent sell alerts on subscribers' positions in Amazon and Twitter early in the trading day Monday and Thursday, respectively... after the companies' shares rose on positive sentiment.
In addition, Doc told subscribers to close out an options trade on drugmaker AbbVie (ABBV) for his third double-digit gain of the week. He booked a 32% gain on the position in only 10 days.
With a healthy gain in hand, Doc and his team advised subscribers to sell their options before the uncertainty of AbbVie's earnings report today.
Kudos to Doc and his team on another job well done.
Does this smell like the end of a 'Melt Up'?
We'll end today's Digest with a timely question around Stansberry Research headquarters these days...
Does this kind of news – big jumps around positive earnings and Tesla's wild swing – represent the sort of investor "euphoria" that our colleague Dr. Steve Sjuggerud says is a hallmark of the last leg of a market Melt Up?
Not quite.
We reached out to Chris Igou, a research analyst on Steve's team, earlier today. And he said Steve and the rest of the team think Tesla's latest moves have more to do with the company itself than anything related to the Melt Up.
But when it comes to widespread investor euphoria, Chris said the Tesla situation does offer one critical takeaway for investors. As he told us this morning...
Before we see a peak in the Melt Up, that same excitement [we saw in Tesla] will hit the overall market.
We'll have much more from Steve and his team in the Digest next week. We're planning to feature some of their latest research in three essays from Monday through Wednesday.
Then, Steve will host an online event on Wednesday night, at 8 p.m. Eastern time, to explain exactly what the rest of 2020 holds for the Melt Up and U.S. stocks. He'll show attendees how to take advantage in a brand-new way. And just for showing up, you'll learn the name of a stock that Steve believes could go up as much as 500% in the months ahead.
The event is completely free, but we ask that you register beforehand. Don't delay... Join the more than 34,000 other investors who have already signed up. Reserve your spot right here.
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All the best,
Corey McLaughlin
Baltimore, Maryland
February 7, 2020