Tesla
stock faded off its highs Friday after a solid open. Don’t blame recalls or Wall Street analysts—blame the rule of three instead.
The electric-vehicle make is coming off Thursday’s brutal selloff that sent its stock plummeting 12%, closing below $183. The electric-vehicle company’s lack of 2024 volume guidance and disappointing earnings call triggered the shares’ dive.
Tesla stock opened up 1.6% and traded to almost traded at almost $187 early on Friday, but receded to change hands at $183.93 for a 0.7% gain. The
S&P 500
was up 0.1%. The
Nasdaq Composite
was flat in midday trading.
Shareholders might hope for a big stock bounce after Thursday’s steep slide, and one might come, but not yet.
The “three-day rule has to run,” says Gary Black, cofounder of the Future Fund Active ETF, which holds Tesla.
The rule of three isn’t scientific. On Wall Street, it is essentially the length of time portfolio managers take to catch their breath after being punched in the gut. Instead of buying the dip, portfolio managers tend to let things settle and think for a minute.
Tesla stock, after a great 2023, hasn’t been kind to portfolio managers so far this year. The EV pioneer’s shares have underperformed the Nasdaq by almost 30 percentage points year to date—that’s bad news when many portfolio managers are judged based on relative performance to a benchmark. If they were overweight Tesla to start the year—meaning they had a higher allocation to the stock than the benchmark index did—they are already 1 or 2 percentage points in the hole, explains Black. That would give managers some pause before doubling down on an investment.
Tesla stock will be weak for a couple of days just because of that dynamic, Black expects. The rule of three is probably a bigger deal than other factors involving Tesla, including Wall Street analysts’ price target updates and the EV company’s vehicle recalls.
Thursday evening, Daiwa analyst Jairam Nathan cut his price target on Tesla stock to $245 from $280 a share, but kept his Buy rating. With a new, next-generation Tesla vehicle slated for the end of next year, he sees the “growth slowdown” extending into 2025.
The analyst cut his 2025 earnings estimate to $4.25 a share from $5.50. Wall Street is at $4.49 a share, according to FactSet, leaving Tesla trading for about 41 times estimated 2025 earnings.
On Friday, J.P. Morgan analyst Ryan Brinkman also cut his 2025 estimates and price target. His target goes to $130 a share from $135. His 2025 earnings estimates fell to $4.25 a share from $4.50. Brinkman maintained his Sell rating on Tesla shares.
In addition to the cuts, Tesla recalled some 200,000 vehicles, according to the National Highway Traffic Safety Administration’s database. The problem is with the backup camera, and was fixed with a software update.
Recalls—as Barron’s has written many times—usually don’t matter to the stock prices of automotive manufacturers. There can be exceptions, of course, when recalls are particularly costly or involve serious accidents. Those instances are few and far between.
Even the recalls that feel like a big deal don’t always affect stock prices significantly. The 2020/2021 Chevy Bolt battery recalls—for potential battery fires—ended up being paid for by a
General Motors
supplier.
The 10 largest vehicle sellers in the U.S.—which include Tesla—recalled some 32 million cars in 2023. Tesla recalled 2.6 million units. More than 99% of the fixes for Tesla recalls were via over-the-air software updates.
Not every manager follows the rule of three. ARK Invest’s Cathie Wood bought the dip in Tesla stock, snatching up some 178,000 shares in two funds on Thursday.
Write to Al Root at [email protected]
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