- Tesla stock has plunged more than 20% from its highs this week.
- Even as Wall Street analysts warned about the bizarre disconnect between share price and fundamentals, Robinhood traders went all-in.
- They’re about to learn the hard way about the counterintuitive effects of a “short squeeze” and the inevitability of mean reversion.
After doubling its previous all-time high in less than two months, Tesla stock (NASDAQ: TSLA) pumped the brakes this week.
By Friday afternoon, Tesla shares were down some 21% from their July 20 high.
That’s despite the welcome news that the automaker had finally turned a profit for four consecutive quarters, technically qualifying it to join the S&P 500 Index.
TSLA traders couldn’t resist taking profits from the frenzied bull run.
The first money out is dodging an inevitable near-term reckoning with the hot summer stock’s delirious overvaluation.
The last money in is buying a bag full of froth. That would be the “dumb money.” And there’s no doubt where it’s coming from.
The Smart Money Races Out – But Robinhood’s Racing In
According to Robintrack, Tesla was the most popular stock on the Robinhood brokerage app for the previous 24 hours.
More than 16,000 new investors purchased TSLA stock in a single day. That’s all the more impressive considering it already appeared in more than half a million portfolios.
Robinhood’s user base trends toward inexperienced, younger investors of the millennial cohort. And it teems with impulsive amateur traders.
Institutional money disagrees sharply with the retail crowd on where Tesla stock is going next.
- Bloomberg data has twice as many “sell” ratings as “buy” ratings from Wall Street analysts.
- JPMorgan’s lead automotive equity analyst calls TSLA “highly overvalued.”
- Bank of America warns it’s “detached from current fundamentals.”
When prompted to discuss high-flying stocks like Tesla Thursday, SEC Chair Jay Clayton said, “I do worry.” He warned the pattern of trading with “significant inflows from retail investors” is “much more risky” than sober-minded, long-term investing.
The retail crowd is trying to get rich quick – and that rarely ends well.
Tesla Stock Is Still in a Short Squeeze Bubble
Elon Musk might be ready to walk back his contrarian remarks about retail investors.
On a January conference call with shareholders, he claimed retail investors have “better insights” than Wall Street:
I do think that a lot of the retail investors actually have deeper and more accurate insights than many of the big institutional investors and certainly they have better insights than many of the analysts.
Since then, retail investors have diverged radically from the Tesla CEO on the value of his company’s stock. They’ve pumped TSLA up to twice its share price since May 1, when Elon Musk said the “stock price is too high imo.”
This year’s extraordinary rally is one part euphoria, one part FOMO (fear of missing out), and several parts Tesla short squeeze.
TSLA kicked off the new decade as the most-shorted U.S. stock. Short interest in the company this January was even higher than Apple (NASDAQ: AAPL).
Back then, Tesla had 1/14th Apple’s market cap. That ratio is 1/6 today.
Short-sellers have lost billions this year on their bets against Tesla. And as they covered their positions, they pushed the stock’s price ever higher. Time and time again.
The unsophisticated retail investors piling into this bubble have little to no conception of these byzantine operations in equities markets. They naively bank on past performance in the hope of future returns.
Let’s settle this once and for all: Elon Musk and Wall Street are right; the people investing in their pajamas are wrong.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.