Summary
We went from a Buy to Strong Buy Rating last Monday on Tesla ahead of deliveries.
Huge numbers and we’re the only sell-side bull with upside. We’re contrarians?!? That tells us there’s still more to go.
Plus we run through our thinking why the market is showing signs of risk.
In this video we review Tesla’s (NASDAQ:TSLA) blow-out delivery number and what it means for future quarters. We also go through why the market (NYSEARCA:SPY) looks short-term peaky.
Tesla: Wow
Tesla had everything working against them. Fremont was down. The supply chain was disrupted. Global demand was in a depression. And they pulled it out?! Could you imagine if the world was in normal-mode right now? How good could it really have been?
About a week ago reported that Tesla was close to break even profit for the quarter. If so the only way we can get there is by having gross margins holding up strong in a very tough quarter.
We were bullish even if Q2 was an EPS loss. But profit means something special so we went from Buy to Strong Buy and even made Tesla a max 10% position in our model portfolio for a period (Model portfolio: Paywall). Our subscribers were pumped of course with the big move.
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Source: Elazar Advisors model with data pulled from company releases
To get to breakeven for the quarter (paywall: Full model) we would need gross margins for auto in the high twenties percent range. That’s of course huge.
Gross margins are heavily influenced by production efficiency and pricing. To have gross margins hold up in tough times gives you some visibility that if and when things normalize they should jump higher.
If so, that would get our EPS numbers even higher than where they are right now.
That gives us conviction that our $1,500 12-month target could be low. We base that on our 2021 EPS X a 45 PE.
In fact we’re the only sell-sider with stock price upside. What’s up with that?
Data From Factset
Above you see the right column of all the sell-siders that follow Tesla. We’re the only ones with stock price upside potential. People are sleeping.
Earnings are jumping. This “weak” Q2 gives you visibility numbers can continue to jump if we ever get normal back in the world. But the brokerage firms can’t see it. They are stuck.
But, whenever Tesla gets S&P 500 inclusion for having multiple profitable quarters which could be soon, all these brokers are going to have to pile on higher to recommend it.
Stock Market Peaky?
Chart From Think Or Swim
Look at the last few weeks. In the video we run through why we think this is having a tough time breaking out to new highs. Something’s weighing it down.
You just had two months of historic high non-farm payroll numbers and the market can’t see new highs. The market’s lower than last month’s NFP number.
Even with the huge Fed support the market seems stuck.
The combination of a slowdown in weekly jobless claims improvement with spiky coronavirus numbers could be holding markets back.
Conclusion
We have no problem switching, but for now the market is showing us even with all the “great” relative news it’s having a tough time moving higher. Coronavirus cases hitting new highs may be holding investors back.
In this video we run through some key measures to watch to help decide the market’s next move.
We also talk about Tesla’s amazing week last week. We were the only bulls? That tells us there’s much more to go as many other brokers have to switch from bears to bulls.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. All model portfolio trades are hypothetical to show direction, conviction and timing. Performance excludes all relevant transaction costs. Opinions given are at this moment and can change rapidly after this is published. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.