Tesla Shareholders May Not Have A Great Day

Feb.19.14 | About: Tesla Motors (TSLA)

Introduction

We've all heard the rule of buying low and selling high but we are generally puzzled by what price is low or high. Although there are strong arguments on whether Tesla (NASDAQ:TSLA) is over, fairly, or even under-valued, the recent sky rocketing trend towards new all-time highs clearly suggests that selling is an idea that should not be ignored.

My overall long-term outlook on Tesla is bullish but the price of the stock has clearly outpaced the progress that the company has made. Perhaps one day we will all wish we bought Tesla at even $200, but ahead of today's earnings announcement, I would recommend cashing in on at least some of your long position and take advantage of any correction. Click to enlarge(Chart from: Ycharts.com)

2014 may tell a different tale

With massive stock growth, media coverage, and talk around the world, it was clear that 2013 was the year of Tesla and Elon Musk. Last May Tesla reported a profit beyond analysts' expectations and the stock price took a massive leap while creating one of the largest short squeezes in history. The Model S was an incredible success and overachieved in every category you could place it in: technology, safety, luxury, practicality, EV or anything else you could imagine. It was no surprise that Elon was consistently praised for his achievements and often compared to Steve Jobs due to his ability to innovate. However, with Tesla being priced so high and beyond its true value, whether it's priced for future growth or not, I believe that 2014 will tell a different story for the stock.

A short interest chart taken from the NASDAQ website shows January ended with nearly 25% of all shares being shorted. Although this isn't the first time this happened, there is a large difference between having 25% of all shares short when the price is over $200, versus a price under $50. Unless there will be very positive information that can justify the current price, it is highly unlikely that the short holders will get burned like before.

(Chart from nasdaq.com)

I understand the future potential here

Just to be clear, I understand that the Model S, along with the Roadster, is probably the greatest thing the automobile industry has ever seen. The Model S is so out of every other EV or hybrid vehicle's league that it isn't even designed to compete with them. Instead we find the Model S competing with the luxury sector with great success. After all, it is attractive, fast, high-tech, economical, practical, and safe, all while being good value. It truly is quality at its finest. In fact, if I was planning on spending anywhere near $50k on any vehicle, I would decide to spend a little more and go for the Model S. Given my common needs in a vehicle along with the savings in maintenance, fuel and Elon's reiterated promise of good resell value, choosing this car is easy. Unfortunately though, this does not apply to the stock. At least for now.

Conclusion

The rule of buying low and selling high clearly applies here, and anyone who actively trades their position should consider pulling back on some of their investment as Tesla has shown to be very volatile following earnings. The recent upward trend has probably made many smile, but I would hate to see them all wiped off due to the desire for more gains. Long-term investors - and I mean long-term - may find that such a potential dip may not harm their investment at all, but it could take years before the current price levels actually become validated from revenue and growth.

To conclude, I simply wanted to share this as today is an important day for Tesla shareholders and is probably the last day to act ahead of volatile days that are likely to come. Unless Tesla surprises us, it is likely that a downtrend will follow.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in TSLA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.