You should pay close attention to Tesla stock prior to its fourth-quarter earnings report later this month. Why? Because the market is, and because we’ve seen some pretty significant earnings casualties in recent days.
We got a good illustration of what a bad quarterly earnings report can mean for a stock when Under Armour (UA) reported on Tuesday. The company’s results didn’t come up to scratch and investors just killed the stock. UA, which closed at 25 on Monday, wound up trading as low as 18.5 on Tuesday and finished the day below 20. That’s the second time UA has been taken to the woodshed. It also took a dive back in October, although the trading volume was much heavier on the most recent selloff.
Fitbit (FIT), which also got scalped back in early November, didn’t even have to officially report its results to get another big correction. Fitbit’s management announced disappointing preliminary Q4 results on Monday and investors were quite happy to drop the stock from 7 to 6.
But Tesla (TSLA) is another matter entirely. While Under Armour is a major clothing manufacturer with a market cap of nearly $9 billion and Fitbit is a small cap stock ($1.34 billion market cap), Tesla is a big deal. The company’s market cap tops $40 billion and any substantial news about new models, Elon Musk, rivals or the company’s battery Gigafactory can grab headlines.
So, whether you own Tesla stock or are interested in owning some, and knowing that the company will be releasing its latest quarterly results within a week or so, you need to figure out what you want to do with the stock. Right now.
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Tesla’s results (or how investors react to Tesla’s results) will be especially critical this time around. Why? It’s because there are a ton of investors out there who are betting against the stock. Short interest in Tesla stock —people who hold short positions in the stock—has reached an impressive 35 million shares. That means that 38.3% of the stock’s float is held in short bets.
This raises the stakes in two ways. First, if the company’s results meet or beat investors’ expectations and the stock price heads up, all of those short positions will have to be covered and short holders will have to buy Tesla stock at its elevated price, no matter what. The buying pressure will push the stock higher and the stock’s advance will gather momentum in a short-covering rally.
On the other hand, it’s always a good idea to pay attention when a large group of investors is betting against a stock. TSLA is a high-profile stock and there is considerable emotion involved in how investors trade it. But the stock rallied from 181 at the beginning of December to 258 on January 25 (with no significant pullbacks), and that creates a feeling that it must come down sometime. You may or may not agree, but ignoring a short position this large would be irresponsible.
The bottom line, whether you own Tesla stock or not, is that you need to have a plan in place for all of the growth stocks, whether they’re in your portfolio or on your watch list. You should know when every company will be reporting quarterly and full-year results, and you should watch how the stocks trade following that report.
Growth stock advisors can sometimes sound like an overprotective mom: “Button your coat. Wear a hat. Look both ways before crossing. Don’t talk to strangers.” But there’s nothing fussy about knowing when a stock’s earnings are coming up and having a mental stop in mind before the report actually drops. Remember, your Mom was right, too.
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