The market has entered its first rough patch in the last three months over the last two trading sessions. I welcome the sell-off as the market has gotten overbought, and also because I have 15% of my portfolio now in short positions and another 35% in cash awaiting better entry points. I still am leaning toward increasing my short positions, and initiated a new one (via options) on Tesla (NASDAQ:TSLA) this morning.
Tesla delivered disappointment to its investors yesterday with a fusillade of negative news (see below). I believe the company will eventually join the ranks of Solyndra and the Chevy Volt from General Motors (NYSE:GM) as testaments to the folly of government financed investments into the alternative energy space. More importantly, even after the 10% sell-off in the shares yesterday, I think the stock is still a short for aggressive investors.
Here is a list of recent negatives for Tesla:
- Tesla says it needs to sell an additional 5 million shares to raise cash, which will dilute existing shareholders.
- The company slashed the revenue outlook for the third quarter as the result of production problems.
- The company has burned through $111 million in cash over the last six months. The company now has around $200 million of cash left on its balance against almost $450 million of debt.
- The federal government agreed to waive some conditions of the $465 million taxpayer loan (can't have the company get crushed in the market before the election) for several quarters.
According to the business description from Yahoo Finance, "Tesla Motors, Inc. designs, develops, manufactures, and sells electric vehicles and electric vehicle powertrain components."
Here are four additional reasons why Tesla is still overvalued at $28 a share:
- Insiders have sold over 1 million of their shares over the last six months, and there have been no new purchases.
- The stock is priced at an absurd 19 time revenues and 70 forward earnings. Both of these ratios are likely to go up given the reduced revenue guidance issued yesterday.
- Operating cash flow and net income have consistently gone down over the past three years, even while always remaining in negative territory.
- The infrastructure for recharging electric cars is extremely immature, which will impede large-scale sales. The company also operates in high cost/high regulation California, which will impact manufacturing margins.