Betting against Tesla (NASDAQ 🙂 this year has been a really bad trade. Every minor correction was followed by a powerful rally, pushing the stock to new highs almost every day.
Tesla shares are up about 500% this year, fueled by improved car sales even during the pandemic and the company making a profit for the.
But that remarkable run appears to be taking a breather this week as Tesla stock has fallen every day since it closed a record high on Monday, the first day of stock split trading.
Tesla stock fell an additional 9% on Thursday to close at $ 407, contributing to a 17% drop since Monday's close. A stock is considered to correct when it falls more than 10% from its last high, while a 20% decline would put it in a bear market.
On the face of it, there were two announcements this week that triggered this downward movement amid the general weakness in technology stocks.
First, it was Tesla & # 39; s plan to sell stock in the marketplace that could dilute its value. The company said in a regulatory filing Tuesday that it plans to sell as much as $ 5 billion in stock "from time to time" to fund its growth as the company doubles the number of factories.
That news was followed by the filing filed by Baillie Gifford, which revealed that the company's largest shareholder had cut off his stake in the company. The Edinburgh-based investor held a 4.25% stake in Tesla at the end of August, up from 7.67% in February and 6.32% in June. According to Tesla & # 39; s current market value of $ 382 billion, the stake is worth $ 16.2 billion.
No fundamental justification
Again, it's hard to say if this correction is the start of a massive downward movement, but many analysts believe the strong run of the stock since the decision to announce a stock split was not a fundamental justification.
Early last month, Tesla announced it would split its shares in a 5-for-1 exchange, a move intended to make the stock cheaper. Tesla jumped more than 80% between when the company announced a stock split on Aug. 11 and when it actually took effect on Aug. 31, although stock splits are purely cosmetic.
With this momentum created by the stock split, there was also demand for Tesla stock ahead of its widely anticipated inclusion in the coveted Index. The automaker was eligible for an S&P 500 slot after making a profit for four consecutive quarters.
When that happens, the stock becomes a must-buy for mutual and exchange traded funds seeking to mimic the benchmark index. At least $ 1.6 trillion in mutual and exchange traded funds track the S&P, according to Morningstar Direct data.
In our opinion, this is certainly not a good time for long-term investors who buy stocks based on their fundamental strength to buy Tesla stock. The shopping frenzy fueled by the home environment has made Tesla valuation nearly impossible to justify.
In a note from CNBC, Credit Suisse told its clients that four key factors have caused the rapid appreciation of Tesla stock, including short investors hedging their positions and passive investors buying stocks before they could be included in the S&P 500. in other words, reasons beyond the basics of the company are the driving force behind stock performance.
Bottom Line
Without reading too much into this week's correction, it's no secret that Tesla and other growth stocks have benefited immensely from the availability of easy money and 1.5% margin loans. These monetary conditions have pushed the valuations of these stocks to unrealistic levels, triggering the law of gravity. We believe that now is not the right time to buy Tesla shares, which also tend to lead the way in a downward move.
