So you own stock in Tesla and you’re freaking out.
If so, it’s hardly a surprise. In the past few weeks, CEO Elon Musk has taken his reputation for bizarre and erratic behavior to a whole new level — smoking marijuana live on air — and your stock has lost a quarter of its value.
With Tesla TSLA, -1.54% stock experiencing another choppy week, finishing up nearly 2% at $295.20 on Friday, investors may feel conflicted.
But here are 6 practical things to focus on instead.
1. How normal is volatility in Tesla stock?
In percentage terms, the latest plunge isn’t the worst Tesla stock has seen since going public in 2010. It isn’t even in the top three. On three separate occasions it’s lost more than a third of its value. In total, Tesla stock has had nine major plunges of 20% or more in the past eight years — plus lots of smaller, but still very unpleasant, drops.
This has always been a highly volatile stock. That’s as you’d expect from a company built by a man some regard as an erratic genius. MarketWatch analysis shows that on the average day Tesla rises or falls by more than 2%. That is more than three times the volatility of the S&P 500. Yet overall since the IPO in 2010 the stock has risen from $17 to $275 at Monday’s close.
2. How many analysts have a ‘buy’ rating?
Tesla is not puffed up by dangerous complacency or euphoria on Wall Street. Just seven out of 25 analysts who cover Tesla have outstanding “buy” recommendations on the stock, reports Thomson Reuters. Nine are outright sellers. These figures were about the same 18 months ago, before the stock’s last big move upwards.
Meanwhile, plenty of hedge funds and other speculators are already betting aggressively against the stock. Nasdaq reveals that at the last count, last month, 33 million shares or about one-sixth of the total had been sold short — meaning speculators had borrowed stock temporarily and sold it in the market, hoping to buy it back more cheaply later.
3. Do you feel nervous about the stock right now?
Behavioral psychologists say we typically make poor decisions when we are panicking or worried. Irrational things that tend to crowd our minds in these cases, experts note, include focusing on what we paid for the stock, and on what it used to trade at. Both are irrelevant.
Holding on “till the stock gets back to where it was” is an appealing-sounding strategy with no logic behind it. There is no guarantee that Tesla will get back to $386. Buying more stock simply to reduce your average cost also has no logic behind it. It does not reduce the cost of the stock you’ve already bought. It simply increases your exposure to the stock.
4. When do analysts see Tesla turning cashflow positive?
Tesla faces a big cash call in about six months, analysts say. “It’s a significant problem,” warns Rajvindra Gill at Needham & Co. If the stock is below $360 next March, he says, Tesla will have to pay out $920 million in cash to settle convertible bonds. Meanwhile, he says, the company only has about $1.2 billion in spare, unrestricted cash on hand.
So Tesla needs to turn cashflow positive in the next few quarters to avoid a crunch. On the other hand, Wall Street analysts are predicting the company will be cashflow positive this year: The consensus is for $1.6 billion in earnings before interest, taxes, depreciation and amortization, and $6.70 in cash flow per share.
5. Should you be concerned about the trading range?
The 50-day moving average of the stock just slipped below the 200-day moving average, a development known ominously as a “death cross.” If this remains the case it may portend further declines — especially if others react to this development and sell, so it becomes a self-fulfilling prophecy.
On the other hand, if you look at Bollinger Bands, a well-known type of trading range that reflects moving averages and typical volatility, FactSet says the stock is already near the bottom, implying a decent chance of support.
6. How much should Tesla make up of your portfolio?
If you’re panicking, consider at least paring your position. Investment experts have typically advised holding no more than 15% of your portfolio in risky or speculative positions overall, and no more than 5% in any one stock.
Many people end up with too much of a hot stock simply by accident: They buy it (happily) before it zooms higher, and then they don’t pare back their holdings. Something that was once 3% of their portfolio becomes 10% or more. Cutting it back to 5%, even at the cost of generating a taxable gain, is generally considered the smart move. If that calms your nerves it’s a double win.