How TSLA Should Be Played

Tesla Motor (TSLA 251.46) gapped above 230 after JP Morgan analyst upped its stock price target to 320 the day before yesterday. It followed through with this strength and was up again yesterday. The stock was up earlier today and is coming back down on  the news that it plans to build a battery "gigafactory" which can build batteries for 500,000 cars. This news is bullish for TSLA long term but some profit taking is reasonable as company warns that the upcoming conversion of convertible notes may negatively impact the stock. Going forward, let's look at why TSLA is still very attractive.

TSLA has a reputation for its big price movement and consistently making new high prices.  And by now its name is very well known. One fact is, investors are addicted to buy famous names. This has been proven true to such well known stocks as Google (GOOG), Priceline (PCLN), Face Book (FB), Netflix (NFLX) , Pandora (P) etc. These stocks continue to make new highs even though more than a few voices  have been saying they are way overvalued. Being a name brand is good for a stock, TSLA will be the same.

Is TSLA really over value as many have said? It is not by the measure of PE/G ratio. That is the ratio between its forward PE and its forward 1 year earning growth. A stock is fairly valued when PE/G equals 1. Over value if higher than 1 and under value if under 1. The degree of the overvaluation and undervaluation depends on how big and small the ratio is . For TSLA the PE/G is (253/3.8)/100x(3.8 - 1.87)/1.87=66.58/103=0.64. A 0.64 PE/G means in order for PE to catch up with G to become fairly priced, TSLA need to be at 395 by next year. That is if the consensus earning estimates are correct. Although the analysts are not always right.

TSLA is also known as a momentum stock. That is, it is a stock investors like to pile on to buying when there is a little bit of good news or when the general market goes up. Its heavy short interest of 37% float also helps it to go up quickly as shorted shares are bought back. It is considered bullish for a stock if short interest is larger than 20% of its float.

Investors.com has a great service called stock check up. I ran the check up on TSLA and its composite rating is a strong 97 out of a possible 99. What I pay most attention to is the accumulation/distribution rating and it is A for TSLA. This means there has been a lot of underline buying on this stock. Investors.com also indicates that there have been 8 quarters of increasing institution ownership. This means institutions have been looking at TSLA and find it attractive.

Checking on institution ownership as a percentage of float for strong stocks I mentioned above, they are as follows: P 101% (I can not explain how this is possible), PCLN 98.2%, NFLX 88.2%, GOOG 86.7%, FB 46.7%. Now look at TSLA, it is at 68.3%. So in order to catch up with the leaders, more institutions still need to pile in and this is bullish.

Finally it's the chart. Price chart is important because it allow us to see how investors are actually placing their bet after they digested all factors related to the company. TSLA has been moving up since last December, and has been trading above its 50, 100 and 200 day moving averages. All trends are up. Stock may consolidate between 228 and 265 near term. The two buy points are when it trade near 228 and when it broke above 265 with initial target 300.

Disclaimer: The above write up represents the opinion of the author only. You are responsible for your own risk when taking position in these stocks. Author of this blog may already own position in the mentioned stocks.