Warning Signs For Tesla And The Stock Market

Summary

• Rising bond rates don’t mean good things for the stock market.
• One-time gross margin issues for Tesla need to be watched to make sure it’s not a pattern.
• Auto companies’ pain is semiconductors' and chip makers’ gain.
• Respect the market.
• Looking for a helping hand in the market? Members of Nail Tech Earnings get exclusive ideas and guidance to navigate any climate. Get started today »

Last week’s stock market action has people throughout the market asking questions. I think we always need to respect the market and the directions that it’s taking. The bond market especially is smart. So when rates rise like they do, it’s something we need to pay attention to closely.

I love Tesla (NASDAQ:TSLA) as a company, but rising rates and one-time issues for their gross margins last quarter are also important to watch. I’m not ready to look to 2022 earnings, so the company is in an in-between valuation stage. And the semiconductor shortage that is hitting the whole auto industry could affect them too.

I talk about both issues in the video above. I also talk about a semiconductor company I like as a result of the auto industry issues and general supply tightness. Limited supply and high demand equals good things for Micron (MU).

Full contents:

Market outlook – The recent sell-off and why it makes sense - 00:30-10:45

• The increasing risks in the market, driven by bond rates and inflation

• High PCE report as a warning sign

• The bond market’s push for higher rates despite the Fed’s efforts

• The power of momentum and algorithms, with GameStop as an example

• What’s the near-term outlook and direction for the market

Stock Focus – Concerns for Tesla – 10:45-18:15

• One-time issues in the Q4 report around gross margins

• The importance of gross margins to the Tesla story

• Semiconductor shortage and interruptions to the delivery story for Tesla models

• The importance of showing that the Q4 issues were one-time and not recurring

Bonus stock – Micron looking attractive – 18:15-23:00

• DRAM pricing driving upside

• There may be more room to run than the usual Micron cycle

• The importance of zeroing in on the key driver for a given stock

Final thoughts – Respect the down move – 23:00-26:00

• The case for selling down and buying up, selling weakness and buying strength

Analyst’s Disclosure: I/we 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.

All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. All model portfolio trades are hypothetical to show direction, conviction and timing. Performance excludes all relevant transaction costs. Opinions given are at this moment and can change rapidly after this is published. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.

Comments

[Sunil Shah]

lol love the vitriol from the Tesla Bulls.
Here, something tangible for you to chew on
SUBJECT:
THE EV/SALES RATIO TO GAUGE INVESTOR MANIA FOR GROWTH STOCKS
(for a primer on the bull argument watch Cathie Wood from ARK on youtube - hilarious!!
i find this one about disruption technology esp funny, or might one say WACKO !!
www.youtube.com/...

OK, BACK TO EV/SALES RATIO TO GAUGE INVESTOR MANIA FOR GROWTH STOCKS
One very valuable metric to show a growth stock's mania is EV/Sales ratio.

Over this past year Tesla's EV/Sales ratio has fallen from a peak of 26X,
and after the 25% haircut in the last week, it stands at 21X

BYD EV/Sales ratio. has moved (since Tesla's peak of 26) from 5.3X to 4.4X today.

Now tell me do you think that is adequate enough of a correction, given the virtually IDENTICAL PROSPECTS going forward
(read this very article for detail)
seekingalpha.com/...

Tesla will halve in 2021 and BYD could double; BYD WILL BE +50% UP ON 2021
mark le post

[break-point]

@Sunil Shah eventually all Auto maker will be EV maker and the EV/Sales ratio will be between 1 and 2 (to be generous) for all of them.

[3carmonte]

03/05/2021 - As $TSLA was down just over 10% just after noon, I then saw it (and the rest of NASDAQ) begin to go positive within 40 mins later. $TSLA down under 5.5% at this post. The brokerage houses have been moving a lot of money around lately. Grab an ant-acid and hang on for full self driving, damn the torpedos! Long TSLA.

[kevinrshort]

Growth stock buyers have forgotten the endgame for a stock. The holder of a stock at the end of the line makes money 1 of 3 ways.

1. Yield (dividends, and/or other distributions to stock holders).
2. The company buys the stock back.
3. The company is bought out.

Tesla, Facebook, Alphabet, etc are too big for number 3, without taking a big haircut. Tesla cannot do 2 at current levels, and it would be foolish to do so. 1. Is also not happening anytime soon.

Don't try to win a game of musical chairs in the stock market, particularly in the automotive sector, where the multiples should be low to reflect the high level of competition. With GM getting into the game again, with the Mustang taking market share from Tesla, with Tesla getting low marks on one of the recent quality surveys, the multiple should be low, not sky high. With a PEG ratio over 5, growth isn't a sufficient countermeasure. This is a euphoria stock, and the euphoria may be evaporating.

[Devi1987]

Hi Chris, obviously you advising people to be bullish on Tesla. How come you can see a potential on Tesla when the P/E ratio its 1k+ buy price at above $600 and apple 2trillion market cap with a P/E ratio of under 40?

[rindradjaja]

Tesla cut its prices up to 24% in Japan, following its price cuts everywhere around the world.

thedriven.io/...

If their sales are truly capacity constrained, there would be no need to drop their prices at all.

[bfyrth]

@rindradjaja agreed, but the fanboys are saying its part of the green mission to get cars into peoples hands, meanwhile EM buys ultra high CO2 emission BTC, but they ignore that part

[mpwrd]

@rindradjaja Japan is a tiny slice of their overall sales. And Tesla consistently cuts prices in line with cost improvements keeping gross margins steady. The more important metric to follow is gross margins, which the author points out above.

[awstout1]

@bfyrth Musk doesn't beat the Apocalypse drum: I'm ok with his car. I'm ok with Selling at an affordable price to gain market share. Why complain uniquely about margins in a growth company, when the order of the day is revenue not profit? With competition ramping up, moving units has got to ramp up too.

[break-point]

Tesla market share of European EV market:
in 2019: 31%
in 2020: 13%
in Jan 21: 5%
in Feb 21: 3.5%
Looks like the competition is starting to wake up big....
I love Tesla and admire Elon Musk but I wonder how a market cap equal to Toyota+VW+Daimler+BYD+GM+NIO+BMW can be sustained over le LT

[Larry Hall]

@break-point I see this POV ignoring the Berlin factory coming soon, and overemphasizing the importance of the European market in the long term. EV sales will explode all over the world.

[nairbdoog722]

@Larry Hall
EV explodes were ICE cars are taxed out of competitiveness. This is California and Europe for the most part. I don't think the U.S. on the whole has the stomach for the strong restrictions/taxes that are needed to move the needle that far. Certain states may follow California's lead (Oregon, Washington, New York?), but in areas where ICE cars are not subject to stronger taxation/regulation expect the transition to be slow and and in some areas non-existent (Wyoming/Dakotas/ etc, rural areas where distance travel is still beyond charging constraints)

[Larry Hall]

@nairbdoog722 That's interesting input. Will take a look at trends and future trends. I do expect more state and local govt's will encourage EV use.

[nexlogic]

There’s a saying in Silicon Valley popularized by fellow billionaire Peter Thiel: “Never bet against Elon Musk,” Tesla’s chief executive. But for Wall Street, there’s always money to be made (and lost) betting against Tesla’s success.

Read in Quartz: apple.news/...

[julianbook]

@nexlogic So did you go long at $900?

[bfyrth]

@julianbook short 850, and target is 60, but will close at 150 for comfort in April/May

[Ernieballer]

@bfyrth Short at 820 PT at 200 by 2022 and 100 by 2023. It's been a lovely ride as the reality of the situation unravels and Robhinhood traders endlessly buying options get shaken out.

[Sermer]

Idk if covid getting better is actually good for the market. It has been riding the massive wave of money printing due to the pandemic which is causing inflation in things such as stocks. If that goes away, all we are left with is a heavily damaged economy. It reminds me of the recovery off the 08/09 recession where bad news was good news because it meant QE wouldn't budge.

What is happening with Tesla seems to be a bit of a leading indicator. It is something that we also saw with the recent meme stock surge and with cryptocurrencies. People are taking huge risks which tends to be an indicator that we are due for a pullback...

How much Tesla will pull back is a huge question mark, however. It has risen a crazy amount so that would suggest that it could drop just as crazily. On the flip side, there really is a ton of potential with FSD that could more than justify the current prices...My money is on a drop to ~$500-575. If that breaks, sub $400 is definitely possible. Buying puts and shares is how I'm going to play it.

[Elazar Advisors, LLC]

@Sermer
Yes a lot of risk taking out there and lots of algos so expect increased vol which is bearish for markets.

[Pts117]

Tesla continues to take two steps down and one step up with lower tops in the rebounds. This has happened 6 times since mid January... Just enough to give the longs some hope and sucker them into "buying the dip," only for that hope to be dashed with a lower bottom and bigger capital losses. Classic.

[Elazar Advisors, LLC]

@Pts117
Longs over time have done very well. But this period is a problem i think for buy dips for stocks in general.

[Pts117]

@Elazar Advisors, LLC

It depends on which dips you're buying... TSLA dips you're right... but energy, financials, and basic materials have done exceptionally well for dip buyers in the last 4-5 months.

[RoseNose]

Thank You both... Very interesting and informative and a good learning experience for me. Happy Investing :)) Rose

[RoseNose]

PS. You are a winner to keep Chaim @Elazar Advisors, LLC - and I keep listening!
I like the tip of knowing the "key" metrics to watch, thanks again.

[Elazar Advisors, LLC]

@RoseNose
RoseKnowsHowToSpotAGoodKeyMetric
wishing you continued success.

[dmzporter]

@Elazar Advisors, LLC would you ever do an essay on algos?

[whatwedointheshadows]

tesla has essentially had the market all to themselves for awhile and still cannot make money. now with a flood of competitors bringing out legit EV theres only one place for TSLA to go. oh and more EV sales by competitors means less need for EV credits (tesla's one profitable business line).

[WillLong]

@whatwedointheshadows
Growth companies are not suppose to have large positive net income. I see no signs of competition yet.

[Elazar Advisors, LLC]

@whatwedointheshadows Tesla's making a lot of money and making more money each year. New entrants will drive them business with free marketing helping the EV space.

[my8cents]

@WillLong are you blind or blond?

[cwfuchs]

Elazar selling his fish...

[Elazar Advisors, LLC]

@cwfuchs fish

[ImRanger]

Thanks for this crucial update. I had the same intuitions and you just confirmed it. Please keep these updates coming. I've been following you for over a year now. Love it. Thank you

[Elazar Advisors, LLC]

@ImRanger Glad you like. Wishing you success.

[Sergi Medina]

All those dumb money idiot speculators will be left holding the bag and will lose loads of money. I try to warn them, but they just won't listen. Such is their ignorance.

[Lanidracl]

@Sergi Medina
There is no teacher/adviser like experience. People who learn from the experiences of others are very rare.

[WillLong]

@Sergi Medina
Yeah, I said the same thing about Tech Stocks in 1998, and look how that turned out! Multiple crashes! I mean, yeah, those people are all rich now and have multiple vacation homes, but they didn't get the safety and security of my dividend payouts. I knew the tech stocks would never amount to much. /s

[Sergi Medina]

@WillLong You can make money from just about everything. If you know how and have some luck. Some will make a lot of money. But most of those speculators will be left holding the bag and lose loads of money.
On the other hand, if you invest properly, you will make money long term consistently, virtually guaranteed.
No use in making money short term if after that that's all...

[ivanz]

TSLA will be range bound for a while and remain volatile.

$620-800. Sell deep OTM options!

[bfyrth]

@ivanz yes, and when the Q1 sales figures and demand cliff is revealed your thesis will go out the window

[Baslim]

@ivanz Believing Tesla will be range bound is recipe for disaster.

[RAP77]

"Rising bond rates don’t mean good things for the stock market."

Polly want a cracker?

Another parrot. When in the last 54 years have yields been lower than now? One time, last year when the world economy was basically shut down.

Even during WWII manufacturing was roaring in the wartime economy and after with the Marshall Plan. There has never been anything like the lock-downs we've experienced. To say bonds are signalling inflation is ridiculous. ANY activity would signal that because it was starting from near zero.

Wall St geniuses are saying the speed of the increase in yields is what's concerning. This is also wrong. Last year, bond rates got as low as .6% or something like that. Then they went up from about .8% to 1.5% fairly quickly and all the fools can talk about is inflation. They should have listened to Powell. He is not worried about inflation and will not raise rates because that hurts working people who have already taken a huge hit. Powell's address where he stated that was truly historic. He's much smarter than the Wall St crowd.

Tesla is not in trouble from bond rates.

[Baslim]

@RAP77 interests rates are of little importance to Tesla. At a 50% increase in earning each year through 2030 Tesla's earning will be $160 per share what happens to interest rates on that is of much less importane to whether Tesla can execute on 50% earnings growthfor 9 years.

[sog1825]

@Baslim there is 0 chance Tesla will achieve 50% growth for 9 years straight.

[Baslim]

@sog1825 That is Tesla's plan for vehicle growth and profits per vehicle will go up with working FSD as good as current FSD BETA and the loss from the rest of Tesla is staying the same. The answer is not 0% and if you think it is then stay away from Tesla as shorting it will end in disaster for you as you won't no when to get out. 5% would be an acceptable answer. Mine is higher but obviously not 100%.

[Larry Hall]

Listened to the intro and the Tesla piece. Very good explanation. Sounds like you want to be Bearish short-term based on 4th quarter margins. But also sounds like advice for trading specifically as your long-term or medium-term view on Tesla remains positive. So, if I am in it for the long term I don't know how to respond in terms of taking action. Not interested in being trapped by a belief that I can predict share price moves month to month...

[Elazar Advisors, LLC]

@Larry Hall I dont say short TSLA. I dont say short individual stocks. This a time that if we dont have upward stock momentum be careful. Thats my message here.

[Larry Hall]

@Elazar Advisors, LLC I did not suggest you did. I am only saying that for long-term investing reducing shares out of conviction that there will be an 'x'% or range dip in the share price for 'y' amount of time is probably not worth it. Maybe it's not 'timing the market' but it is 'timing the Tesla' and the call could just be wrong. Looking out one year, which is 10% of the time I plan to own the stock, approximately, I see the price between 1200 and 1400. So I will not sell. But if you are right, then not adding at the moment makes sense.

[Maxed Out Mama]

Well, we all know that the extremes of monetary policy over the last year have created some interesting dynamics, and risks are high.

I would recommend this article from BIS re the Treasury/TIPs spread. I think the Fed has ways to address this, and I do think the Fed is going to try to do so:
www.bis.org/...

It's going to be awkward going forward. There is a natural tension and a natural disconnect between the expected interest rates under Fed policy and the expected real-world goals of their policy, and I am skeptical that they can keep the lid on for too much longer.

[Fundamental Trader]

@MaxedOutMama And what do you think the Fed's real-world goals are?

I ask because a lot of people seem to be under the false impression that the Fed will try to keep rates capped or close to 2.5% - it's even mentioned in this video.

Jerome Powell has already made it clear he expects and wants to see higher rates than this over the next few years. He pointed out that the 2.5% area is basically no more than an approximate target, over the long term (not month by month or even year by year) for an economy that's performing well, not for a recovering economy. He has no intention of trying to limit inflation to 2.5% or even 6% in the short-medium term (a short-term spike could take it a little higher and he'd still be ok with that).

[rktung]

@MaxedOutMama the central banks have a huge problem. They cannot get to normal which is no more bond buying without a huge disruption to markets. They can’t even slow down without markets reacting.

So they all say they want inflation, bond rates move sharply higher, reflecting commodity markets, etc., markets begin to sell off so central banks add liquidity because they get nervous and don’t want to be blamed for a major sell off, as if recessions can be banned or managed. Central banks have painted themselves into a box. They insist on no bubble when in fact it is financial assets right under their noses and the very market they’re supposed to be managing.

I see no signs of disinflation, energy, agriculture, housing, lumber, metals such as copper are all up significantly and will feed thru into real economy, sooner rather than later. It seems to me consumers are already feeling inflation in wallet, just look at restaurant prices over the last few years.

[Maxed Out Mama]

@Fundamental Trader

I think they really intend to jam it until employment improves, but I don't think they can pull it off. It's a lot like trying to build a house with just a hammer.

They are driving commodities inflation, but they probably can't drive the wage rises necessary to keep it going. You would need to restrict immigration to accomplish that.

I think the real strategy is just inflation as in the post-WWII era, when the US had massive debt and basically inflated out of it.

[Lucky-boy_Lion]

“Respect the Market” hahaha 
Phi Omega Omega Phi

The market isn’t an entity. No more than capturing light in a jar.

[Elazar Advisors, LLC]

@Lucky-boy_Lion
uh

[Zane Farris]

@Lucky-boy_Lion you missed the point.
respecting the market means you take price movements seriously and don't easily assume that your ideaa are better than everybody else's because the 'market' is made of everybody including yourself.

[Lucky-boy_Lion]

@Zane Farris I think you conflate. I.E. I didn’t say those things you claim...
Don’t put words in my mouth. That’s disrespectful. If you can’t respect me (one person) and just my statement at that, how can we expect the masses to respect “the Market”? Hahaha

In my opinion it doesn’t matter either way, bc the market isn’t an entity. An entity is something ostensible, like a box or a person. A collection of records as to how some people from all over decided to trade or not trade (i.e the market) isn’t the same. The market isn’t an entity. Just like I can’t respect the color red, in general, I can’t respect the market. It isn’t that kind of thing. It’s a concept, of either the day’s, week’s, month’s, year’s record, of how people traded stocks/options etc. At its core “the Market” is just receipts. You could have on Day 1 a market of John Kahn and Luke who all purchased X,Y,Z amounts (respectfully) of stocks Q,P,Z and on Day 2 a market of completely new traders/investors all of which who purchase completely different amounts of completely new stocks. Consequently the various stocks move with respect to how they either were, or were not, traded. If no one buys or sells, any given stock, that stock does not move. In contrast, if more shares are sold of stock Q in total for, say, a day than are purchased, then the overall price per share of Q go down: more shares and less demand. Vice versa, if more shares of Q are purchased than are sold, say, in a given day, then the overall price per share of Q will go up. *This price movement happens instantly and typically each subsequent (presumed) “buyer” is so buying at steadily higher prices, so justifying the actual minute mathematical adjustments throughout the day, of said stock, and vice versa for the case of more volume sales than volume shares purchased. And you could expand further on the minute details I’m just going to not get into those here. Like variety of reasons for why people decide to buy various stocks at the given mathematical prices that they do... The general main point is just prior to the “*”.

Back to my example about day 1 and day 2, all the members are different depending on the day, so who would we show our respect to if the market is such a thing deserving respect? See the absurdity? Therefore we can’t respect “the Market” bc its not that kind of thing. “The Market” is supervenient on the participants who vary day to day.... “the Market” is just a collection of receipts essentially. Imagine piling up all your receipts and showing that pile respect. That’s analogous and so equally absurd. I mean just bowing to a pile of paper isn’t respect and you can’t achieve respect for a pile of paper. It isn’t that kind of thing. That’s what I’m saying.

[MRTOTTY03]

Booooo. Tesla continues to excel regardless of your short position

[notAgainPlease]

@MRTOTTY03 you are delusional. Elazar has been the biggest bull for tesla in the entire market for years

[Elazar Advisors, LLC]

@MRTOTTY03 were not short. We have a street high target based on 2022 eps but i'm not using 2020 eps until April. For now stock fully valued.

[Steve Funk]

@MRTOTTY03
The TSLA price has excelled. The Tesla has not excelled, but I am sure they will in the future.