Hey There Income Hunters,
I’ve read many reports recently about the death of Tech, mostly due to higher interest rates and their impact on valuations.
Well consider the gun a bit jumped.
Tech was lagging coming into October, but has led the way this month.
And it came within a hair of a new all-time high yesterday.
I wrote a couple of weeks ago that I thought US Tech was facing headwinds …
And although I did not put any plays on it then, I am ready to lay down a bet here …
Today I’ll lay out a couple of ideas and what I am looking to do.
Tesla (Ticker:TSLA) Market Cap
Here is an eye-opener …
Tesla’s market cap is nearing the size of the entire S&P 500 energy sector!
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- TSLA: $1.01 trillion
- S&P 500 energy sector: $1.14 trillion
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TSLA is a car company and, yes, they just inked the largest order in electric vehicle (EV) history this week — 100,000 Model 3s heading to Hertz.
But I believe we are going to see a massive move out of stocks and bonds into the raw materials needed to build all the EV and green energy …
So I am willing to bet that TSLA will not continue to demand such lofty valuations over the energy stocks much longer Especially because TSLA will have competition in the EV space anyway from Toyota, Ford, GM and NIO.
TSLA Valuation …
My discounted cash flow model gives us a good idea on TSLA’s fair-value price based on earnings per share (EPS) and EPS growth …
They don’t distribute dividends, so it is just straight EPS and then the expected price-to-earnings (PE) in 10 years…
So, the fair value is around $700. Meanwhile, the stock closed today at $1,018 …
That means TSLA is currently trading at a 51% premium to fair value.
Now, if you think we are in a melt-up phase that will take the S&P 500 above 5,000 then TSLA could probably maintain its momentum
I do expect a Christmas rally that may get us there, but I also see trouble outside the US, mainly in China and Europe. If one or both suffer some type of shock it will hurt the US, as well.
Check out the Technical Structure
Notice the massive volume the past couple of days ending with a shooting star candlestick pattern …
I’ll have to confirm with Option Pit’s Queen of the Candlestick Licia Leslie, but I believe that is a bearish pattern that tends to be very reliable …
The logic behind it is bull’s come in heavily buying as the euphoria behind the stock is at a peak, then sellers come in and push the stock down.
The prices get low enough that the late buyers now turn into sellers and the market loses near the open, leaving a small body with a long wick above.
The Trade
I found a decent $TSLA Nov. 12 990/970 put spread for $7.75.
If TSLA closes below $970 at expiration, that would return 158% on the initial $775.
I would use a stop loss of 50% on the trade to limit capital at risk and increase return on that capital …
The key is to make sure TSLA takes out today’s low to confirm the bearish candle reversal.
Bring It Home
I like to get in trades after a capitulation of buyers or sellers at the end of a trend, and I think that is what we are dealing with here
The tech area definitely has some headwinds as inflation and bond rates rise, so the probabilities of correction are good.
I have a couple of other extremely overvalued tech names to share, but I will wait until their earnings are announced and reassess.
Until then …
Live and Trade With Passion My Friends,
Griff