A couple of weeks ago, I wrote an article discussing the prospects for another major short squeeze for shares of Tesla Motors (TSLA). In the article, I discussed the rising short count combined with low volume, as well as rising analyst estimates. A day after my article, Tesla shares popped on Q4 2013 delivery numbers. Investors that bought the day my article was published could be sitting on a $35 to $40 gain at the moment. Good for them. Today, I'll discuss whether or not investors should take some money off the table when it comes to Tesla.
Why did shares pop?
In his remarks at the Detroit Auto Show on January 14th, Tesla VP Jerome Guillen stated that the company delivered 6900 vehicles in Q4. Previous guidance from the company called for slightly under 6000 vehicles. Tesla shares, which bottomed that day at $136.67, rocketed higher, closing the day at $161.27. That day was the highest volume day for Tesla shares since November 6th. Tesla shares came off their recent highs above $182 last week during the recent market pullback, but have rallied most of the way back, closing Tuesday at $178.38. You can see the recent rally in the chart below.
(Source: Yahoo! Finance)
The latest short interest update:
Recently, NASDAQ released its twice a month short interest update. As you can see from the chart below, there was a small decline in shares short for Tesla. A little more than 336 thousand shares were covered during the first few weeks of January. This was the first short interest decline since the middle of October, after five straight increases.
Some investors may have been looking for a larger drop on the good news. Why did that not happen? Well, there are a few reasons. First, we don't know how short interest fared throughout that time period. What if short interest went up to 35 million in the first week of January, then came back down? Second, the short interest update is based on a settlement date of January 15th. The good news for Tesla only came out on January 14th, and the run to $180 plus did not occur until the following week. It's possible that a number of shorts did not get out immediately. I think that the next update (end of January - released Feb. 11) on short interest is the real key to watch. Remember, with a float of less than 84 million shares, more than 37% of the float was still short as of this latest update.
In my last update, I mentioned that the days to cover ratio, at 4.08, was at its highest level since April 2013. From the end of November to the end of December 2013, the days to cover ratio doubled. Thanks to slightly lower short interest, plus a little more volume, the mid January update had a days to cover ratio of 3.31. Should short interest come down at the end of January update, I would not be surprised if the days to cover ratio dips below 3.00.
Analyst estimates keep rising:
While Tesla's stock price has been soaring, so have expectations. The following table shows a history of Q4 2013, as well as full year 2013 and 2014, analyst estimates since Tesla's last quarterly report. You can view all of Tesla's current estimates here.
*2014 revenue growth figure based on 2013 estimate at that time, which will continue to change until we get final 2013 results.
Since the Q3 report, analysts have raised Q4 revenue estimates by nearly $100 million, of which more than $40 million has come in 2014 alone. Obviously, Tesla's announcement of 6900 vehicles delivered is going to help. With the company not announcing an official earnings date yet, there is still plenty of time for estimates to keep rising. Last year, Tesla reported Q4 results on February 20th.
You would think that Tesla still has room to beat for Q4, as not all analysts have updated their estimates it seems. One analyst is still calling for $589 million in Q4 revenues. With the stock soaring on the good news, expectations have as well. Every time an estimate goes up, it reduces the chance and size of a potential beat.
What could go wrong?
So what could trip up Tesla here? Well, despite a huge Q3 revenue beat, the bottom line non-GAAP EPS number was not a huge beat. Q4 estimates have come down by 2 cents since the Q3 report. EPS numbers initially dropped by a nickel, but have since risen thanks to the pre-announcement of Q4 deliveries. We don't have any official "whisper numbers" just yet, but I would think that the built-in expectation will be for at least $0.20 to $0.25 for Q4. Short of that range, I think there will be disappointment.
Tesla's guidance will also be crucial. Will the company give a formal delivery number for all of 2014, or just go quarter to quarter? Currently, analysts are looking for a sequential increase of just $8 million in revenues for Q1, meaning just 18.4% Q1 revenue growth over the prior year period. If Tesla does not give a strong Q1 forecast (or full year 2014 for that matter), I think the stock gets punished no matter what the Q4 2013 numbers end up being.
How much do you own, past a year?
When it comes to considering taking profits in Tesla, it's wise to look at the overall structure of your position. If you bought below $140 and are sitting on a $35 plus gain, taking some profits may not be a bad idea. I don't think it is ever a bad idea to take some profits, even if you think a stock is going higher. It can always go lower, and I personally think it is better to regret missing further gains than to lose your profits. If you bought Tesla at say $50, profit taking seems even better.
Another item to consider is portfolio weight. With Tesla at $140, the stock probably did not carry as much weight in your portfolio. Unless the rest of your portfolio has rallied as much as Tesla has, Tesla's weight in your portfolio has probably jumped. If you have a limit on how much you want in any one name, Tesla may have exceeded your limit. In that case, profit taking could be a good idea.
Finally, think about taxes and how long you've owned Tesla shares. On January 28th, 2013, Tesla closed around $38 a share. If you can now sell you shares and face a lower capital gains tax rate, it might be very wise to do so. I'm not a tax professional, but if your tax bill becomes a lot lower, profit taking could be a good idea.
If I sell Tesla, what do I do?
Ignoring taxes for a minute, selling Tesla shares will leave you with cash in your portfolio. What should you do with that cash? Well, we have seen a little market pullback recently, so you could hold some cash if the market dips a little more. If the market does go down, Tesla will probably see one of the bigger falls. Shares declined almost $18 from the $182 plus high last week to Monday's low during this brief pullback. But if you want to use that cash right away and stay in the game, here's a couple of potential suggestions.
My first suggestion is to consider rotating into a name that's been beaten down recently. Apple (AAPL) is an example of this. The tech giant reported great overall quarterly results, but iPhone unit sales missed expectations and forward looking guidance was weak. Apple shares lost $44 on Tuesday and are now down about $70 from their 52-week high. Apple might go a little bit lower, however, Apple has a few things Tesla doesn't. First, you get an annual dividend yield of 2.41%. Second, Apple has the biggest and most powerful stock buyback right now, one that could be raised sometime in 2014.
Perhaps the other reason you are selling Tesla is that you want a more stable name in your portfolio, a little less risk. Well, why not consider cigarette giant Philip Morris (PM)? The stock is near a 52-week low as the company gave a disappointing forecast for 2014 a few months ago, but most of the weakness should be priced in by now. Philip Morris is using 2014 as an investment year. While that will hurt earnings in the short-term, estimates have already been reduced tremendously. The mission here is to improve the long-term health of the business, especially by moving into e-cigarettes. Philip Morris also has a strong buyback and a 4.65% annual dividend yield. Switching from Tesla to an income-producing investment might be a good move for your portfolio.
If you're looking for diversification, I have an ETF that may be right for you, the PowerShares Buyback Achievers Portfolio ETF (PKW). This particular exchange traded fund invests in companies that are buying back stock, and lots of it. It is a fairly diversified ETF and one that has outperformed the S&P 500 by a fairly wide margin over the short and long-term. If I were looking to buy any one non-standard index ETF right now, this would be the one.
Tesla shares have rallied strongly since my last article on the name, and I think investors should consider taking some profits. While the company's Q4 deliveries number was better than expected, estimates have been surging in recent weeks. Any Q4 beat won't be as large as might have been expected in the past, and with shares up $40 in two plus weeks investor expectations may be even higher. I also think we'll see a decline, potentially a sizable one, in the end of January short interest numbers. If a large number of shorts cover, the prospects of a further short squeeze are diminished.
In the end, I'm still bullish on Tesla in the long run. I see the company as one of the best potential growth stories over the next three to five years. I do believe that the name will break $200 at some point in 2014. The median price target is $9 above Tuesday's close, meaning analysts have decent faith in the company as well. But with such a large rally since my last article, I'd be doing a disservice to my readers if I didn't suggest some profit taking. Especially with the market a bit nervous, investors looking to buy Tesla should probably wait until more panic comes, like the fall that took shares from $182 to $164 in just two days.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.