What Can Investors Learn From The Tesla Trade?

| About: Tesla Motors (TSLA)

By Paul Quintaro

On Friday last week, shares of electric car maker Tesla (NASDAQ: TSLA) spiked sharply lower going into the close. The company announced the resignation of two senior engineers working on Tesla’s Model S project—a fact that may have spooked investors into dumping shares.

Tesla lost nearly one-fifth of its value in the final few minutes of trading on Friday, dropping roughly 19%.

However, early on Tuesday, shares of the company spiked higher again. A few major analysts defended the company, stating the sell-off was overblown. Investors appeared to buy the argument, as Tesla finished the trading session up nearly 17%.

Notably, Goldman Sachs maintained its price target on the company to $35 per share, and moved its rating up from Neutral to Buy, noting that the sell-off presented an opportunity to eager investors.

Deutsche Bank followed Goldman, but was not nearly as aggressive. Deutsche Bank maintained its rating of Hold and $24 price target, but did not find the engineering losses to be a cause for concern.

The engineering losses may initially have been seen as severe due to the nature of their work—both employees were senior engineers on Tesla’s long awaited Model S. With the Model S nearing completion, investors may have seen the move as an early sign of impending failure—the engineers leaving before their work could be revealed to the world.

Of course, that may not the case. Tesla stated that both left for personal reasons. In its report, Deutsche Bank said that Tesla has spent years amassing talent from many companies in the auto sector, and that the engineers should be fairly easy to replace.

The Model S is Tesla’s upcoming sedan. It will be priced around $60,000—which puts it far above the price of General Motor’s (NYSE: GM) Volt for instance. However, the Model S is a pure electric car—not a plug-in hybrid—and should offer greater luxury for the environmentally minded consumer.

Tesla’s other vehicle, its electric roadster, has largely been a halo car. Attractive, flashy, but far removed from the meat and potatoes type of product behind a successful, major corporation.

The Model S may not be that big-ticket item Tesla needs, but it could put Tesla’s name out there, as more consumers opt for the Model S over other luxury sedans.

Regardless of the overall value Tesla provides, the situation may be indicative of the nature of these one-off events for stocks.

Carnival Corporation (NYSE: CCL) may have seen a similar situation, as heavy losses were prompted after one of the company’s ships ran into a rock off the coast of Italy.

The situation regarding Tesla may suggest to investors a strategy of caution in the face of major headline news. Knee-jerk, overreaction, could lead to regret, as investors who sold Tesla on Friday may have seen on Tuesday.

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