$TSLA stock will likely continue to climb into the 12/21 S&P rebalance, as index mgrs complete much of their purchase of 120M TSLA shares by Fri 12/18. I’m not as optimistic as others about TSLA ‘s ultimate price rise, given TSLA’s 43% increase since 11/16 vs 16% float needed.
2/ It’s difficult to quantify how much front running has been by HFs and traders who have bought $TSLA in anticipation of index funds having to buy TSLA on the rebalance at the prevailing market price. Looking at trading volumes pre- and post-announcement...
3/ $TSLA has traded 51.5M shares per day (of 760M float) since 11/16 vs a 10-day avg of 26.6M shares per day prior to 11/16. That implies 250M excess shares traded since 11/16, which could just be multiple round-trips of algo- and day trading by all mkt participants.
4/ No one knows what supply of shares will come to market on rebalance date vs the apprx 120M shares needed by indexers to fill their 1.40% bm weight. $TSLA ‘s price rise so far exceeds any other S&P inclusion. My best guess is $690 on the upside by 12/18, and a 10-20% retrace.
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Here are 10 reasons why you should be buying $TSLA today at $560:
1/ Huge EV runway ahead, with global EV penetration now 3% likely to go to 20-25% by 2025 (6-8x increase).
2/ TSLA’s EV share continues to grow - not fall - as TAM expands, even as ICE competitors launch...
their own EVs. New EVs take from ICE vehicles, not other EVs. This is the biggest research flaw in $TSLAQ ‘s short thesis.
3/ $TSLA has several positive Dec/Jan catalysts to propel it higher, including wide FSD release (12/15), MIC Y production (12/15), CyTruck update (12/15).
4/ FY’21 vol guide of 800K+ will exceed Street ests of 774K (1/27). That will spark a fresh round of 2021 $TSLA earnings increases, pushing TSLA PTs higher.
5/ Biden’s 1/22 inaugural address will include clean energy, incl restoration of $7,500 credit on all EVs, incl TSLA.
Key debate: How many $TSLA shares are needed prior to 12/21 inclusion? 1/ Indexers only: 120M (16% float) 2/ Indexers + active mgrs: 120M + 180M=300M (40% float) at bm wt
My feeling: It’s closer to 120M since: 1/ Active mgrs with S&P bms could have bought TSLA all along, and..
2/ Most funds with S&P bms are core/value and will find $TSLA expensive at 150x 2021 Street EPS. Growth mgrs usually use R1000 growth as their bm. That said, with TSLA in their bm at a 1.4% wt, mgrs have to make a conscious decision to own or not own it. It’s too big to ignore.
3/ Here’s the math:
$TSLA wt: (760M float x $590)/ ($31.4T+$0.5T)=1.40%
Index mgrs: $5Tx1.4% /$590= 120M shares (16% float)
Active mgrs: $7.6T 1.4%/$590=
180M shares (24% float)
Index mgrs: 1.4% wt mandatory
Active mgrs: 1.4% wt optional
For those who are new followers, I went long $TSLA in Sept 2019, and hold it at 20-25% of my portfolio. It remains my largest position. My $720 TSLA PT has increased twelve times since Sept 2019 as fundamentals have steadily improved. I have never reduced my TSLA price target.
2/ I consider myself a disciplined growth investor. I like companies with best-in-class products, expanding TAM, brand leverage, and megatrend secular tailwinds. I always have a fair value that I think a stock is worth, calculated on present value of future earnings. $tsla
3/ Like many growth investors, I trade opportunistically around my positions - meaning, if I see a decline of 10-15% coming, I will lighten up and buy back at a lower price. Conversely, if $TSLA gets slammed for a reason I think is dumb (e.g., product recalls), I buy more.
I’m going to try explaining this again. $TSLA value can be calculated using a present value (PV) framework. Inputs:
Curr Yr EPS
EPS growth next 5 yrs
Div payout (if any)
10yr Treas yld
Equity risk prem (ERP)
Beta
Steady state P/E 5 yrs out based on proj EPS growth after Yr 5.
2/ I estimate $TSLA value using a 5-yr PV framework. Others use 10 or even 20 years. TSLA’s PT is the price at which I expect TSLA to trade in 6-12 mo. Mathematically, the PT is the PV of all dividends, plus the future price of TSLA in 5 yrs, disctd back at TSLA’s cost of equity.
3/ $TSLA pays no dividends, so all value is in the 2025 stock price, which is based on the P/E in 5 yrs, mult by the proj earnings in 5 years.The discount rate is the risk-free rate (10yr Treas yld), plus a risk premium equal to the mkt equity risk premium (ERP) ~6% x TSLA beta.
To understand why $TSLA rises or falls, it’s best to use a present value (PV) framework.
PV is based on Yr1 EPS, growth over next n years, dividends, 10yr Treas yld, equity risk prem (ERP), beta, and a “steady state” P/E at which a stock trades n yrs out, based on future growth.
2/ For growth stocks, it’s best to take earnings out a few years to compare P/Es, and P/Es should be measured vs exp growth (PEGs).
3/ When a company like $TSLA beats earnings ests, it rises because future earnings often get revised upward, and P/Es can be repriced if markets assume the acceleration in growth persists. Non-recurring items (e.g., one time tax credits, legal settlements) are normally excluded.
As a growth mgr, I look for three ways to generate alpha (excess risk-adj returns): 1/ Acceleration 2/ Catalysts 3/ Non-consensus bets
Some pms say finding stocks that trade at less than intrinsic value generates alpha, but absent one of the above, stocks can stay cheap forever.
2/Acceleration - If the market concludes that a 20% grower will now grow at 30% because of a new product, tech breakthrough or TAM expansion, the market will re-rate (increase the P/E of) the 20% grower to that of a 30% grower, and investors get both P/E expansion and higher EPS.
3/ Catalysts - Generally vols, earnings, new products, corp events like stock splits, M&A/buyouts, S&P inclusion, new govt policy, etc. These events don’t always add value, but often shine a spotlight on the difference between price (what you pay) and value (what it’s worth).