Monday, January 27, 2014

Tesla Is The New Bubble Stock

If it looks like a bubble and acts like a bubble, it's a bubble.

Tesla Motors (TSLA) is the new bubble stock.

There is a lot of money to be made and lost in a bubble stock, but the trouble is bubble stocks are for trading not investing.

Once a bubble is underway almost anything can happen in the short term, but in the long term the outcome of a return to market normality is extremely likely. That doesn't mean you can't make a lot of money out of the madness, it's just a very dangerous game.

Risk equals reward and bubbles are immensely risky, which is why there is reward to be had. As such, bubble stocks draw investors to them like the clichéd moths to a flame.

Bubbles are lovely to behold. Look at this delightful chart:

Let's go closer. Fascinating. What's that burning smell? Wow it's me!

Of course the best thing to do is ignore these kinds of stocks but that sadly is not going to happen. The reason TSLA has gone to the moon–shares are up more than 500% over the last 12 months–is everyone wants in. Saying "avoid" is futile.

Saying Tesla's stock price is too high is not the same as saying Tesla is not a brilliant company. Tesla has done a great job. The stock isn't through the roof for nothing. You just have to see one of its cars on the road to want to own it. It is so "lick-able" it looks like an iPhone with wheels.

What did they do to the paint job to give it that opalescence? Or is that the new owners just polish it 24/7? Who knows, we shouldn't care. Perception can only be reality for so long.

We should stick to the land of comparative valuations and likely outcomes. So Tesla is a great company with a great product, but is it a good value investment? Let's keep that for later, but you can guess right off what my opinion is: no it isn't.

Is its stock going to rise? Why not? Once "superstar" status is achieved normal laws of the market no longer apply.

If Tesla wasn't a superstar stock it would be the easiest call in the world to short Tesla, but with the U.S. market's bi-polar tendencies, this is the first thing to avoid doing at this stage. There is always plenty of time to short Tesla and it will be a long time after it made perfect sense to do so. Superstar stocks can stay in orbit a lot longer than you'd ever guess.

So go long? Going long Tesla is purely a trading position, there is no long-term reason to cling onto this company at these heady valuations. Not unless TSLA invents anti-gravity paint.

I know no one wants to hear this but Tesla is worth twice Fiat, the owners of Ferrari.  Tesla and Porsche are worth about the same. You could buy Peugeot Peugeot five times over. Should Tesla be worth half of GM? The market thinks so and the market is always correct. Right?

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So how to play the stock? Well first off, if you aren't in, leave this one alone unless you want to play a high risk gambling game with your money. Tesla is now pure speculation.

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