Tesla (TSLA) Stock: Headed for Mars or a Hard Landing?

Andy Kern, Senior Portfolio Manager, New Age Alpha
Jan 23, 2020 7:21:00 AM 5 min read

Not many $50 billion companies double in price in less than half of a year, yet that is exactly what we have seen with Tesla in recent months. Sales for the company are soaring, and so are expectations. But how do we balance these factors? More importantly, how do we approach a company with a future so bright, yet so unclear?

Tesla (TSLA) can be labeled a car company, a solar company, a lithium battery company, a technology company, or a vision company, and is led by one of the great visionaries in business. This is a good problem to have, but it is still difficult to forecast the future of a company with such dynamic, diverse and forward-looking initiatives. And it is even more difficult to analyze the stock.

However, our investment methodology is well suited for this task. The H-Factor is a risk that comes from humans interpreting vague or ambiguous information in a systematically incorrect way. We believe that the H-Factor causes stocks to be mispriced. We measure how the H-Factor affects stock prices to identify which stocks are over or under priced. By measuring the H-Factor and deliberately avoiding high H-Factor stocks (stocks that are overpriced), we can outperform.

At is core, the H-Factor is a gauge of emotion, a barometer of how the price of the stock has behaved relative to the company’s fundamentals. It does this by setting a standard for each stock and by comparing the price to this standard it identifies when the market has priced in vague or ambiguous information. When the market gets too optimistic without any support from fundamentals, H-Factor scores increase. When it gets too pessimistic, the H-Factor scores decline.

Tesla stock is wrought with emotion. If there is a single stock in the market today that is affected by optimism and pessimism, it is Tesla. It is a unique company and has the large investor bases on both the bull and bear sides. Those calling for the company’s demise are sure the company is fraudulent, will delist, and acquire the infamous ‘Q’ to the end of its ticker. They’ve even started a twitter page: #TSLAQ. In contrast, the bulls are ardent supporters of the company, giving feedback, discussing investment opportunities and championing company accomplishments on Tesla’s forum.

The H-Factor can help keep both camps in check. While the company is not very profitable, its unit sales and revenue are exploding. Taking an H-Factor approach can clarify what this means for the stock. Consider the chart below, which plots stock performance alongside H-Factor over the past two years.

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Pricing data provided by Refinitiv. H-Factor data provided by New Age Alpha

 

Over the last year in particular, the stock has reached highs above $500 and depths of $180.Throughout this time, the H-Factor has remained below 30%, suggesting that regardless of price, Tesla has been able to deliver.

From a traditional value standpoint, TSLA has never been cheaply priced at all. The company did not generate a profit until its 2018 fourth quarter earnings. From a technical standpoint, the breakout from the downward trend in July of 2019 and continued new highs is inexplicable. However, applying the H-Factor risk to TSLA provides an illuminating understanding.

For the first six months of 2018, the company had a stretch of H-Factor scores reliably below 25%, suggesting the price range of $250 to $350 could be justified. Subsequently, there was a spike in H-Factor in August 2018, climbing to 50% and eventually 60%, which relayed caution. A rise in H-Factor from its original base in November and December of 2018 suggested taking profits as the risk/reward scenario worsened.

The emotions surrounding Tesla...

...led to a significant decline in H-Factor in early 2019. As selling pressure generated by emotions brought the stock price down, Tesla’s H-Factor fell as well – to 20% by February of 2019. In addition to increasing risk by boosting stock prices, human biases can sometimes put downward pressure on a stock too. It is quite possible that the bears were dominating in the first part of 2019, keeping the stock price down and allowing the H-Factor to fall as performance began to catch up. When the stock beat earnings in October, and the market reluctantly began to concede that company fundamentals were strong, the stock was poised to skyrocket—and it has. A historical look at the H-Factor shows its harmonization with such movement.

At $550 per share, Tesla may indeed be an attractive investment opportunity. What we have seen in recent months is a classic case of the market impounding vague and ambiguous information into a stock price. Tesla’s H-Factor is now relatively low at 20.3%. Many interpret the latest run up as an indication that TSLA is overbought and suggest taking profits. This may be the case in the short run, but based upon the H-Factor we believe that the company will continue to deliver, and the stock should continue to perform in the long term.

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The above statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. The views stated herein are only current through the date stated and are subject to change at any time based on market or other conditions and New Age Alpha disclaims any responsibility to update such views. New Age Alpha does not currently own TSLA and did not own it at the times set forth in this article. There is no intention for New Age Alpha to include this security in its portfolio unless it becomes part of the established universe of eligible securities that are part of each specific investment strategy (e.g. the S&P 500®). It is important to note that there can be no guarantee that the application of the H-Factor to investment portfolios or certain stock or securities can produce profitable results. For full disclosure, click here.

January 22, 2020