Tesla: How To Know When Something Has Been Already 'Priced In'

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 |  About: Tesla Motors (TSLA), Includes: ATVI, COSI, EA
by: Andrew Cherna

There are a lot of great investing cliches. Falling Knives, buy low/ sell high, greed is good. I'm here to talk about one specifically that people like to throw around a lot: "priced in."

The phrase "priced in" is meant to signify that X event has already been factored into Y's stock price. The problem is identifying when/ if X's event is actually already factored into, also known as, "priced in" to Y's stock price.

I was having a discussion about Tesla (NASDAQ:TSLA) motors with a friend over dinner the other day. I mentioned that the Model S is being released a month ahead of schedule, and that I think it could be a great catalyst for the stock price if the release goes as planned. His response was very nonchalant and mentioned that the event is likely already "priced in" to the company's share price.

However, there is reason to believe that the Model S release, or at least a very successful one, has not yet been totally "priced in" (I really dislike using cliches like 'priced in' but I will continue to do so in this article for the sake of simplicity).

  1. There are still a lot of naysayers and skeptics around Tesla. A lot of these people are likely thinking, or perhaps merely hoping at this point, that the Model S release will be a huge flop. These are the people who do not believe in the technology or have objections such as the fact that electric cars may not be much better for the environment. As evidenced by the amount of debate surrounding Tesla on Seeking Alpha, there really are a lot of these people.

  2. The short interest for Tesla is the highest it has been since 6/15/2011, at a staggering 25,850,776 shares which is approximately 44.16% of the float according to Highshortinterest.com and comes with an estimated 18.55 days to cover. Can somebody say, short squeeze? Nicu Mihalache called for one last year but he seems to have been a little ahead of schedule.

  3. Awareness is really starting to spread about Tesla already with new stores on the East Coast. I think the word about Tesla could/should spread like wildfire on TV and online very soon if the release goes as planned June 22nd and people are enjoying their cars without any problems. The Model S release is truly going to be a monumental step for the company. No matter what happens with the release, there should be lot of free press which could be a great catalyst for Tesla's share price

  4. There are price targets as high as $49 from smart people like those that work at Wunderlich Securities who have been afforded the opportunity to see the Tesla factory in California.

There is not much more for me to say about Tesla that has not been said by others on here. I will thus conclude with my thoughts on "pricing in" in general.

The same friend of mine referred to investing as "like a game." I tend to very much agree with him. There are a lot of similarities to sports and stocks. Just like sports, we have TV networks and websites that cover the events of the day. We have reporters who cover the events live on the floor, just like in sports. In a lot ways, investing really is a game. What is different about stocks versus sporting events are that the rules are a lot less clear, as are the people you are competing against.

Figuring out if an event is "priced in" is not an easy task. I read a great simplistic analysis of investing once that is also a little bit scary. There are only a few thousand publicly traded companies and God only knows how many financial professionals. Every day these people are staring at their screens trying to gain that little edge that will put them ahead of the competition. Little old me is competing against enormous corporations that underwrite offerings, have complex financial models, and vast resources. These include the ability to meet CEOs and important people within the company, and also fly out to the company's facilities and assess for themselves whether they think X company is going to be successful. I have the ability to do none of these things.

In my case, essentially all I have is my brain and an internet connection. Thankfully, the internet is a very powerful resource. I am able to learn that people with these vast resources have visited the Tesla factory and have a price target of $49. While I realize that much caution needs to be exercised when listening to analyst recommendations, (I put very little to no weight in most of them, in my opinion there are too many conflicts of interest these days to assess whether or not someone is being truthful or just pumping up a company's stock because the company they work for is investing in it), it is still useful to know that there are PT recommendations as high as $49. This tells me that perhaps everything has not yet been "priced in" to Tesla.

There is a lot more to be said about pricing in. Ultimately though, I believe that it is a matter of literally predicting the future. If there is a high degree of uncertainty surrounding X event, than it would seem as though that event is not yet priced in to Y's stock price. In this article I used Tesla as an example, but this theory could be applied to any other equity. For example, my investment thesis surrounding COSI, Inc. (NASDAQ:COSI) is that the franchise will come out of the doldrums with new management and eventually expand into a national chain well beyond the only 16 states it now has a presence in. With a share price of .79/share, this certainly is not yet priced in to the share price.

It works both ways though. I have noticed a lot of amateur investors chase stocks like Activision (NASDAQ:ATVI) or Electronic Arts, (NASDAQ:EA) because of a hot game relase like "Diablo 3" or "Call of Duty 5." In those cases, there was/is very little uncertainty concerning the success of those games. Thus, it would seem as though that information was much more likely already 'priced in,' because the successful release of those games was essentially common knowledge.

Any thoughts about Tesla, "pricing in," Cosi, Activision/EA, or anything else, are sincerely appreciated.

Disclosure: I am long TSLA, COSI.