Tesla's share price is overdue a crash

Electric carmaker Tesla’s shares have defied gravity for too long, says Matthew Partridge.


Tesla has been forced to cut the price of its Model 3 saloon
(Image credit: 2016 Kyodo News)

We don't have the best record where Tesla is concerned. Twice this column has recommended that you short the electric-car company and twice the shares have risen. Last year, we were convinced investors were going to desert CE Elon Musk after his claims about taking Tesla private turned out to be hot air, prompting regulators to intervene. Instead, he went and pulled a rabbit out of the hat in the form of Tesla's first quarterly profit since 2016.

A crowded field

Still, the fundamentals are unchanged: Tesla is overvalued as it is a barely profitable player in a sector facing intensifying competition. Indeed, almost every car company is now pouring large sums of money into electric vehicles (EVs), and models are starting to reach showrooms. Honda's budget Urban EV is getting all the attention, but there are also models from Mercedes, Kia and Audi. So it's no coincidence that Tesla announced dramatic cuts to the cost of its cars in January.

While Tesla is trumpeting this move as a way to boost sales volumes, it is likely to reduce margins dramatically, even if the group follows through on its plans to close down its showrooms and move sales online in an attempt to cut costs. And the online-only sales idea could backfire badly as most people will not be content with merely viewing a car online before buying it.

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While Tesla has said it will increase investment in service centres there are suspicions that these could be scaled back, a risky move given the numerous faults that have plagued its models. Meanwhile, Tesla is also talking about launchinga sport utility vehicle (SUV), which will mean taking on companies with much more experience in this area.

More trouble in the boardroom

At the same time there is further turmoil in Tesla's boardroom, with chief financial officer Deepak Ahuja leaving at the end of last month for the second time. Ahuja's departure appears particularly significant, given that most experts agree Tesla needs to issue more shares in orderto pay bonds that are due to expire over the next 12 months.

The latest storm over Elon Musk's tweet about production figures won't help matters either, and if the Securities and Exchange Commission succeeds in getting Musk barred from being a director (unlikely, but possible) Tesla's shares could end up plummeting.

Overall, I'm going to recommend you short Tesla's (NYSE: TSLA) shares at their current price of $285 at £10 per $1. I'd suggest you cover your position if they rise to more than $385, giving a potential downside of £1,000. This is a slightly lower degree of leverage than I'd normally employ and reflects the fact that the shares have been volatile in the past, as well as my previous record with the company.

How my tips have fared

It has been a good fortnight for me. First, six out of seven of my long positions increasedin value.

Greene King went from 625p to 662p, Cineworld climbed from 260p to 284p, John Laing Group went from 354p to 385p and JD Sports rose from 467p to 481p. Bellway increased from 2,812p to 3,056p.The only share that went down was Hays, which fell very slightly from 160p to 156p. Overall, five out of my seven positions are making money, withJD Sports and Greene King leading thepack at 810p and812p respectively.

Meanwhile, three out of my six short positions went down in price. Bitcoin declined from $3,807 to $3,722 and Twitter slipped from $31.23 to $30.50.After coming within pennies of breachingthe stop-loss level of $53.50, Weis Marketsfell to $46.59 (from an original level of $52.81). Snap increased to $9.92 (from $9.12), Just Eat went up to 769p (from 731p) and Rightmove appreciated to 500p (from 477p).

At present my bitcoin and Twitter positions are making money, Snapis breaking even and Just Eat, Weis and Rightmove are making significant losses. Profits of £2,438 and £1,079 on my long and short positions respectively mean that I'm making a total of £3,622 on my open positions. Clearly, this has to be offset against losses of £3,255 on my closed positions, but at least the former total eclipses the latter, with a small profit of £367.

I'm not going to close any positions at this stage, but I recommend you should reduce your stop loss on my short positions on Twitter and Snap to $33 and $11 respectively. As far as my long positions are concerned, I have also opted to increase the stop-loss on my punt on Greene King to 575p.

Trading techniques... when CEOs are axed

Despite their large salaries, chief executive officers (CEOs) in large listed companies have a surprising degree of job security. Stockbrokers AJ Bell found that while more than half the clubs in the top four English football divisions have replaced their managers over the past year, only ten FTSE 100 companies have seen their bosses depart.

Boards tend to wield the axe if a company's share price is doing badly. A 2008 study by Steven Kaplan and Bernadette Minton of CEO tenure found that between 1992 and 2005 the worse a company's stock did relative to its competitors and the overall market, the more likely a CEO was to be ditched.

Of course, the more interesting question for traders is: what happens after the person at the top is forced to walk the plank? One theory is that, because boards are so reluctant to act, the departure of the CEO suggests things are really bad. Still, some argue that the exit of the CEO is good news because it heralds a turnaround under a new leader. Contrarians argue that executive churn can make investors too pessimistic.

However, the evidence is contradictory. A study by Carl-Emil Lindholm of the Stockholm School of Economics foundthat in the week after the announcement of a CEO's exit, the stock price of Swedish firms fell by an average of 1.7%. Yet research by George Gianarikas, of Fundstrat Global Advisors has found a small majority ofUS firms that change CEOsbeat the S&P 500 index in thesix months after the new boss arrives. Interestingly, the outperformance gets bigger in the medium term. After a year the average stock outperforms the overall market by 6%.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri