So, what’s going on with some of our worst performers?
24th May 2019 |
Tesla is the worst performing share on the Nasdaq-100 this year and there is a very large short position. Its self-driving technology has been implicated in another accident. The capital raise that took place last month has not arrested the decline and now the bonds are starting to fall too.
The reason I have been willing to sit with Tesla is because the bond market was relatively sanguine about default risk. That has changed in the last few days with the 2025 5.3% callable bond yield breaking out to new highs, which is currently at 9.33%. That is a signal the bond market is now taking the possibility of a slowdown in demand for Tesla’s vehicles seriously. If bond investors are paying attention, then we are no longer in the realm of idle chatter.
I bought Tesla because I believed it was on the cusp of an upward break as production of the Model 3 ramped up and as the Gigafactory neared the completion of its final two production lines for batteries. It has some very difficult issues to work through with production, which are in hand – but if demand for its cars is waning, that is a serious problem.
The end of subsidies for its vehicles is certainly a contributing factor but the second is it is not coming out with refreshed models quick enough. The long talked about pick-up truck is still years away and Rivian, an upstart competitor, is due to start production of its pick-up truck in 2020.
So, what do we do with the position?
The bear case is well understood and we are starting to see analysts begin to compete for the most bearish forecast. I saw one today from Morgan Stanley for $10 a share. That tells me that everyone who wants to be short is already short and leveraged. Even a modicum of good news could set off a short covering rally. Against a backdrop of a price that is accelerating, I believe we are close to an important trading low.
The price is currently within about $10 of its lows from 2014 to 2016 so we are in the region of a potential area of support, which is why I continue to hold the share.
One of the positives about Tesla is that it’s aiming to provide its own insurance.
The same is true of Intel, which has also pulled back rather sharply over the last few days. That followed an announcement by the new CEO that PC demand is falling and the growth in providing products to cloud computing companies is unlikely to make up for that.
That’s a disappointment at a time when the sector is under pressure from the trade war and potential disruptions to Chinese demand for products. The share is also in the region of a previous low so there is scope for a rebound from here, which I will use to close the position.
Superconductor Technologies engaged in the previously announced capital raise on Tuesday, which is going to garner $1.7 million for the company. That will be used to cover expenses as it ramps up towards production later this year.
Meanwhile, I would like to update you on my thoughts about the case for a melt-up that I made in the same issue I recommended Tesla. Wall Street has come roaring back from its December lows and a relatively modest consolidation is underway on the primary indices. Provided that is the extent of the decline, there is a solid case for the market to break successfully on the upside.
As you can see from many of our other positions which are at new highs, there is already evidence of upside leadership. The closest analogue I can think of is the period in late 1997 and 1998 when the market had a significant wobble before really going on a tear. There is real scope for a similar breakout to occur following the summer lull.
All the best,
Eoin Treacy
Investment Director, Frontier Tech Investor
