Mark W. Bertolin's  Instablog

Tesla Motors designs, develops, manufactures, and sells electric vehicles and electric vehicle powertrain components. The company also provides services for the development of electric powertrain systems and components, and sells electric powertrain components to other automotive manufacturers. Tesla recently released earnings and posted their first profit. On this news share pricing rocketed to a 52 week high in a parabolic move to $97.12. It has since retraced to $81.61 giving up pricing nearly as quickly as it gained. The one-month chart below illustrates the magnitude of the move.

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When a stock move as aggressively as Tesla has moved with a $.12 EPS announcement it points to other factors moving the price other than business fundamentals. Yes, its is wonderful Tesla posted its first ever profit and did it ahead of estimates but did anything other than hope move the price?

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With a short interest of 23.85%, and volume nearly double the average of 11 million shares, it seems like the traders have decided that pricing is headed down. As of this writing shares are down to $81.61 representing a 7% decline in daily pricing. One interesting dynamic of Tesla is that institutions hold 70% of the shares. This level of institutional ownership can have two effects, one positive and one negative. As long as Tesla performs to meet investor expectations high institutional ownership acts as a stabilizer. The risk is that when one of them decides to sell it has a magnified impact and others may follow, believing correctly or not, that one of their peers knows something that they don't.

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Since Tesla is barley profitable is it a place to invest? What do the institutional investors see in Tesla that others do not? I have toured the manufacturing facility and main showroom. It is impressive. Tesla represents a departure from every other automotive alternative in that they are focused exclusively on electric power. No comprise has been made in the design or quality of the Model S which compares favorably with the benchmark Mercedes Benz S class sedans. In addition to the manufacture and sales of cars they also have a robust design and engineering studio reminiscent of the Porsche Design Group. The consumer market will tell us over the next few years if battery powered cars are the path to the future, but in the mean time Tesla has successfully carved out a luxury niche and is supporting the brand with aggressive warranty and guarantee programs. With retail pricing ranging from $62,000 to $90,000 Tesla is targeted squarely at the luxury buyer.

Our thesis for Tesla is strait forward. If there is a market for electric cars Tesla is in the best position to capitalize on the transition from fossil fuel to battery and they support auto sales with technology licensing and engineering consulting while the market builds.

To enter the Tesla trade I will use Sell to Open Cash Secured Puts priced at the $70 strike for June 22nd 2013. This level is slightly below the 38% retracement of $73.3 and $4.11 over the next retracement at the 50% level of $65.89. If Tesla stock pricing falls to $70 or under by June 22nd I will own 100 shares. Today the Put pricing is trading for $4.00. The risk with this trading strategy is that Tesla share price will fall below $70 and I will buy shares at a higher than market price in June. The next quarter earnings announcement is scheduled for July 24th.

I think it's too risky to enter a position at current levels but I do want to take advantage of their swing to profitability and opportunity for the future sales. There are no competitive luxury brands in the market. If the market segments into the categories I foresee then Tesla will be the global leader in luxury battery powered cars.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

Once in awhile a well thought out plan just goes horribly wrong. Thankfully this doesn't happen very often but in the case of Apple the pain is now and it's severe. In an article written in December titled Listen to The Quiet we laid out a five-step review thesis with the fifth point being "Yes, key metrics have changed. Gross margin is one metric that is critical to assessing fair pricing and profitability. It is declining but not at a level that causes us to question our position. It does add risk to ownership from a share price perspective. If traders key in on gross margin and overweight its importance we could see significant share price decline in the short term." In retrospect we accurately assessed the risk but unfortunately the investments we selected prior to our tactical revision have suffered. The analyst community and then the media jumped o Apple with negative opinions that drove down the share price. There is such a significant level of noise surrounding Apple that the fundamentals of the company seem to be devalued. Although I appreciate technical analysis, and use it. In this scenario calling for price declines down to $320 depending on Fibonacci retracement predictions does not accurately represent the current situation or future earnings and growth potential.

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So what happened? In November threatened federal tax increases caused many investors to take profits in 2012. Since Apple has performed so well it was a key stock to sell. As the tax based selling was occurring media pundits were calling for the end of the Apple era due to their opinion that the current product mix wasn't revolutionary or profitable enough. Since when does an opinion on creativity merit selling a stock? Sell stock when you feel that the company is headed for trouble as in balance sheet trouble, or market trouble. If Apple is in trouble, its trouble we want to be involved in!

The chart above demonstrates that the PE for Apple compared to both the technology industry and the market is flashing bargain. The chart below reflects the historical PE. As you can see the PE is now back roughly to where it was a year ago.

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In the case of AAPL the company performance does not synchronize with the markets reaction. The ex-dividend date of February 7th, will likely result in an orderly increase in share pricing. We suspect that many of the previous sellers will re-enter their positions to capture the dividend. Although Apple's dividend yields 2% it brings $2.65 per share back to the portfolio.

We remain long AAPL and committed to our long-term positions. We view selling at the current levels in an attempt to protect further asset erosion working against our longer-term goals. There have been many articles written reviewing last quarter's results and market analysis so restating the data here will not be helpful. There is an excellent article addressing dividends and earnings by Todd Johnson, which we found helpful.

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If you feel that AAPL shares will rebound and their business will be worth something more than its current share value in 2014, then now is the time to prosper from the current price decline. We will scale into an increased long position in Apple earning $10.60 per share along the way.

Disclosure: I am long AAPL. 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.

Once in awhile a well thought out plan just goes horribly wrong. Thankfully this doesn't happen very often but in the case of Apple the pain is now and it's severe.

In an article written in December titled Listen to The Quiet we laid out a five-step review thesis with the fifth point being "Yes, key metrics have changed. Gross margin is one metric that is critical to assessing fair pricing and profitability. It is declining but not at a level that causes us to question our position. It does add risk to ownership from a share price perspective. If traders key in on gross margin and overweight its importance we could see significant share price decline in the short term." In retrospect we accurately assessed the risk but unfortunately the investments we selected prior to our tactical revision have suffered.

We remain long AAPL and committed to our long-term positions. We view selling at the current levels in an attempt to protect further asset erosion working against our longer-term goals. There have been many articles written reviewing last quarter's results and market analysis so restating the data here will not be helpful. Dividends are a component of our decision-making. There is an excellent article addressing dividends and earnings by Todd Johnson, which we found helpful.

Our current challenge, now that we have decided to retain our long positions, is to recover from the previous tactical trades that are now problematic. We routinely use options to increase profitability on Apple. Some of these positions are going backward so fast its demands immediate attention. The problems with the options is the cost of shares if assigned is greater than the recent value so when the shares transfer to a long position we would be underwater.

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To facilitate at least a partial recovery we will be implementing a new long positin and a roll over plan for cash secured puts. The objective of this tactic is to move the risk out farther into the future and hopefully capture additional upside. The current trading situation and pricing volatility seems irrational and too unpredictable to warrant closer term investments. Rolling over a put consists of placing an order comprising a buying to close order for a current position, and at the same time selling to open a new position. Back when Apple was trading in the mid $600 range we opened a position in a cash secured put with a strike of $525 dated February 2013. At the time the order was placed a strike price of $525 seemed far enough off to not cause assignment of shares. Obviously we missed the mark on this trade. The put was sold to open and we collected a premium of $12.21. The same put currently trades at $86.05. If we do nothing there is a very good chance that we will get assigned shares in February at $525 if AAPL is trading at $525 or under. If we simply close the position it will cost us $73.84. Neither of these outcomes are acceptable.

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In order to recover from this situation we will buy back the current put position and open a new position as far into the future as possible. January 2015 Strike 500 puts are currently priced at $115.40. This recovery tactic moves the risk out farther into the future and yields a roll over yield of $29.35 on this trade and $41.56 inclusive of the original premium that we kept. Part of being an investor is admitting when you have been wrong and finding ways to recover. An additional key consideration is the challenge of how to take advantage of the current AAPL pricing situation. Looking at sell to open put option orders can be a helpful way to capture profits without buying shares. If you feel that AAPL shares will rebound and their business will be worth something more than its current share value in 2015, then put options could be a less expensive way to profit from the current price decline. The only true recovery will be for AAPL shares to rebound. With the current yield there is time to wait and get paid for it. This new tactic allows time for that to occur.

Disclosure: I am long AAPL. 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.