Tesla Motors, Inc. (TSLA) has been an excellent trade. The position has recovered strongly and is a very good example for traders who speculate on changes in investor sentiment.
Trading a stock like Tesla is about price momentum as much as anything. And every business, no matter how successful or fast-growing, experiences operational difficulty. This creates opportunity for a trader who is comfortable going against the market.
Tesla ran into problems with its “Model S” and was required to do a recall to help prevent battery fires after an accident. It was a short-lived but perfect storm in investor sentiment, which created an attractive new entry point for traders. (See “The Stock Everyone Is Talking About; How Much Higher Can It Go?”) The company’s stock chart is featured below:
While many investors/traders are attracted to low-priced or penny stocks for their turnaround potential, these stocks are usually down for a reason. In buoyant, highly liquid capital markets like we have today, a buy-high/sell-higher type of strategy can pay off.
The risk is that the price momentum ends, whether it is due to a material corporate event or a general decline in speculative fervor. Biotechnology stocks as a specific stock market sector are particularly prone to strong price momentum because of the strong participation from institutional traders.
Tesla is now a $24.0-billion company. The position didn’t do that much after listing, then it just exploded with extremely strong price momentum on much higher-than-average volume.
As a research strategy, scanning the stock market for new highs can yield some very good trades and/or stocks worth following for an attractive entry point. Just like penny stocks are down in price typically for very good reasons, the opposite is true with those stocks that are the market’s most successful.
At the very least, being familiar with the stocks that are making new highs helps hone your market view in terms of the degree to which speculative fervor exists and where the hot trading action is actually taking place.
Both individual companies and specific industries experience perpetual changes in investor enthusiasm. As institutional investors are the drivers of share prices, their attention span is transitory. Solar energy stocks, gold stocks, and 3D-printing stocks are examples.
And with the perpetual change in investor enthusiasm for specific companies and sectors, it therefore pays to know which stocks are hitting new highs, even if you’re not a momentum trader.
Eventually, Tesla is going to have to deliver the goods in terms of earnings growth. There is a tremendous amount of goodwill and high expectation in this stock.
But that is what this trade is all about, with traditional financial metrics not part of the equation at this point in the company’s development.
The current environment is still a very good one for traders and risk-capital investors. Interest rates are low, liquidity is high, and institutional participation is robust.
Eventually, of course, price momentum ends. Getting out of successful open positions is equally as difficult a task as finding the right ones in the first place.