Momentum name and cult following stock Tesla Motors (TSLA) has officially lost its Teflon cover and a few billion dollars in market capitalization as a result. The once flawless company promising to replace the combustion engine in America with quiet, clean running electric cars has hit a speed bump. Stories, videos, reports and rumors of problematic operation and even fires are dirtying up a once perfectly clean green story, especially with regard to capital profits. Also, established carmakers have risen to Tesla's challenge and are introducing pure electric models that can compete on class and comfort. Finally, the closing of the fiscal year for many institutional portfolios allows them to now take profits off the table with tax repercussions pushed forward to the next fiscal year. In my view, these three factors have the richly valued stock inevitably showing signs of vulnerability. So momentum has logically shifted from Tesla's favor to against the stock.
Tesla's shares were 38% off their 52-week high of $194.50 at last check, though notably still 285% above their 52-week low of $31.52. That "what have you done for me lately" mentality that troubles the human mindset surely has shareholders focused on the more recent decline than the immense gains booked earlier this year.
Tesla was like Teflon for most of the year. No argument or valuation could stop it on its way toward $200 a share. Comparisons of its market capitalization to sales ratio versus that of legacy automakers Ford (F) and General Motors (GM) were preposterous, and yet some Wall Street talking heads made sense of it. They argued that even though the company had far fewer sales, it deserved the market capitalization premium it sported because of its market penetration opportunity and its disruptive presence in industry.
1 - The Competitive Factor
What momentum mania failed to adequately contemplate was that competing luxury electric car models were on the way from deep pocketed manufacturers' well known brands like BMW (OTCPK:BAMXF), General Motors' Cadillac, Volkswagen's (OTCQX:VLKAY) Porsche and Audi (OTC:AUDVF). Tesla has first mover advantage, yes, but it is unclear how well a lead it might hold given the serious competition now aiming for it. That uncertainty is harmful to the stock's rich valuation, and has altered sentiment about Tesla's once unquestionable dominance in its niche. Certainly, it has been Tesla's success that has inspired the intensified effort of its once comfortable rivals, but that won't stop the chipping away of its valuation now that other cars are coming to market.
2 - The Quality Factor
Confidence in the product was once lifted by "Car of the Year" honors and other similarly valuable reviews and positive publicity. So even though Tesla was making cars for the very first time, Model S buyers still felt comfortable purchasing from the company. Tesla also worked hard to maintain a good standing with its customers, offering unprecedented in industry customer service, including the picking up of troubled cars and repairing and returning them without delay, while supplying temporary replacements no questions asked. This strategy smartly kept publicity working in the company's favor.
However, when videos started showing up on the internet of Tesla vehicles burning on the highway, that infallible reputation was tarnished. Suddenly investors remembered that lithium batteries have a history of catching fire, whether they be in cell phones, laptops or airplanes; so why not also in Tesla's vehicles. Despite the fact that the number of fires per car on the road compares well to combustion engine fires, the nuance of the new electric car catching fire is too attractive to media and popular interest to not be noticed and even highlighted. That of course did not escape the attention of investors either.
3 - The Capital Flow Factor
The little guy has a disadvantage to the big institutional investor, because he cannot simply alter his fiscal reporting year. Most individuals operate on a calendar year for tax purposes, and so any sales of stock individuals make today will be taxed in early 2014. Institutions, though, often close out their fiscal years in September, October or November, and probably not by coincidence. Also perhaps not by coincidence, institutions can sell stock ahead of individuals without taking a tax consequence in early 2014. Regulators seeking to iron out a fair playing field for investors of all shapes and sizes might consider reviewing this situation. This topic has not been discussed or debated before, and so I ask anyone referencing it in the future to remember to attribute me properly for raising the issue.
Anyway, as it stands today, with several months in between the fiscal close of tax years for individuals and many institutions, those institutions with offset tax years may sell the year's biggest winners with perhaps inflated at-risk valuations ahead of individuals, and I believe they do so. So, I also believe a fair game does not exist for individuals because of this. And institutions avoid the pressure of the full market by offsetting their tax year.
Tesla was one of the year's biggest winners with one of the market's most questionable valuations heading toward the close of the year. Given also the competitive and quality concerns that have arisen, institutions with offset tax years have all the reason to sell the stock before individuals start to do so. I believe they are doing so now, and so the shares of Tesla find special selling pressure as these three factors shift momentum against it and its rich at-risk valuation. In my analysis, I have contemplated what Tesla might do to stop momentum against it and shift it back in its favor, and that will be the topic of my next article on the company, so stay tuned.