Identifying exceptional managerial ability is far from a scientific process with there being few objective and reliable tests of managerial competence, and the disciplined investor must resist the urge to invest in enterprises run by self-serving managers and operators. It would be hard to argue that Musk is running the company in the best interests of the owners of the company rather than as a staunch promoter of his overall brand, and this blog post touches on that.
Insider selling and repeated big stock sales are also obvious red flags. How can a prudent investor consider purchasing shares in a business when those running the company with knowledge of the innermost workings of the business are selling stock? If we align ourselves with Musk, then should stockholders also be selling stock?
Moreover, did Wall Street institutions who lent billions to Musk have any understanding of the intrinsic value of Twitter? Was there a failure in due diligence? Was interest rate risk ignored when evaluating the prospects of Twitter? Was rigorous fundamental analysis of the free cash flows, book values, debt/equity, liquidation values, current and coverage ratios considered for safety of principle in the decision to lend?
OR was the lending of capital by Wall Street just a big gamble on the future market price of Tesla Stock?
In theory, if 63% of Musk’s Tesla stake is pledged as collateral for other loans, Musk’s solvency rests largely in the nominal stock price of TSLA. If the market price of Tesla encounters distress and moves significantly lower from the price levels the collateral was pledged at, this could trigger margin calls by his lenders, further forced selling of Tesla stock by Musk, and the potential spread of contagion to other investors and institutions vested in the stock.
Perversely, history has shown that there is often a disconnect between the media narratives created around companies and how their respective securities trade in the market.
When we apply our proprietary technical analysis to TSLA stock, we can identify on a near/medium term basis the market price of TSLA appears to be undergoing consolidation within a range bound market. The current market price is $237.01 with institutional pools of resistance around $300 and institutional pools of support around $100. The current market price of TSLA is far from a terminal extreme, is absent strong pools of institutional support or resistance and is lacking a favorable asymmetric reward to risk set up. We recommend a neutral stance for current holders of the stock and against taking any directional positions in TSLA at this time.
Will there be a catalyst that triggers a severe shrinkage in value at Tesla or does Musk’s genius find a path to propel Tesla to even greater heights in the future? The Practical Contrarian uses the objectivity of market price action and application of proprietary technical analysis to help navigate this process.
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