I’ve been tough on Tesla (TSLA) for more than six months. It’s been well-deserved.
From calling it one of my least favorite stocks in the Nasdaq 100 to talking about its eventual descent to $100 – a target that I still hold – Tesla has set itself up as an easy target for the bears.
But I’m giving them a slight warning ahead of its earnings on Tuesday afternoon.
Let’s look at where the stock lies the day ahead of the report…
Tesla closed out its worst quarter since 2010 in March after the stock lost 29.3% of its value. The worst two quarters ended in December and June of 2022 with returns of -53.5% and -37.5%, respectively.
The troubles that plagued Tesla during those terrible quarters in 2022 are like now, with one additional issue, the recent inventory gain.
Last month, the company announced an increase in inventory numbers as deliveries dropped. The numbers show an increase in price competition between Telsa and other EV producers, namely in China.
Over the last month, we’ve seen several moves from Tesla’s management, including changes to pricing. Last month, the company announced an increase to certain models, despite the inventory build.
This morning, Tesla announced the reduction of model pricing as well as a reduction to fully automated driving subscriptions.
These recent moves, along with cost-cutting measures including a 10% reduction to the company’s workforce, implies that the EV maker is preparing to get aggressive in its operations.
Put simply, this just isn’t the company that it was a few years ago. But I’m re-invoking a rule that I went against just a month ago…
Don’t short Elon Musk - at least not ahead of this report.
From a post-earnings performance perspective, this table is interesting.
For the last five years, Tesla’s average return two weeks after its earnings has averaged 17.2%. That’s despite the company only trading higher 37% of the time.
That’s the number’s way of telling you that if there’s any rally in Tesla after Tuesday’s report its likely to be huge.
This quarter could be one of those “kitchen sink” quarters for the company. That refers to a company throwing all the bad news into one quarter’s earnings report. Think of it as a purge of bad news.
The goal is to get everything priced into the stock to allow a long-term bottom to form. That’s the risk with Tesla as we head into the report.
From a technical perspective, it makes sense. Note the chart:
On a short-term basis, Tesla stock is trading at an oversold level.
What that means is that the stock’s RSI has dipped below a reading of 30. Historically, that indicates that a stock has fallen too far in a short amount of time and is due for a “dead cat bounce” at minimum.
The last oversold reading came at the end of January just shortly after Tesla’s last earnings report. The results were a consolidation at $180 followed by a rally to $200 before reversing course to $160. That’s a “dead cat bounce.”
In addition, the number of short-term puts that have opened on Tesla are notable.
That’s a sign that the market is expecting a bad showing from the company’s earnings report. Pessimistic sentiment like this often means that a bad earnings report has already been priced into the stock. This means that it will be harder to see the stock move below $140 over the short-term.
I’m choosing to close my intermediate-term short position on Tesla ahead of the earnings report. Call it the “a bird in the hand is better than two in the bush” trade.
Oversold readings on the stock chart and a sudden surge in pessimistic sentiment has the earmark feature of a panicked market that will draw short-term buyers into the stock on the tiniest bit of good news in the report.
Let the dust settle on this report and return to the stock as a bear in the weeks following its next rally of 10-20%. You’re likely to catch this “dead cat” just before its next trip lower.
