The
Tesla
bull-bear debate is heated, filling up a lot of time on financial and social media. Lately, the bulls have been in command, but there might be a lot fewer true bulls than investors assume. Just look at how the stock trades.
Tesla stock (ticker: TSLA) dropped 9.7% following better-than-expected second-quarter earnings. Incredibly, it was the same percentage drop as the dip following first-quarter numbers when profit margins dipped following steep start-of-year vehicle price cuts.
A one-day move isn’t a reason there might be few true bulls. Trading volume is the issue. Tesla stock traded roughly 173 million shares Thursday. The volume-weighted average price, or VWAP, for Tesla stock yesterday was $269.72—so about $47 billion worth of stock changed hands the day following the earnings report.
That’s more than 5% of the market capitalization of the entire company. It’s more than 6% of the market capitalization excluding stock held by CEO Elon Musk. (He trades less frequently.) The comparable number for
Apple
stock (AAPL) on Thursday is about 0.4%.
The earnings report isn’t responsible for the difference. Tesla stock typically trades about 10 times the dollar value of Apple on a given day. (Dollar value is just the number of shares traded multiplied by an average price.) That means Tesla’s entire market capitalization turns over every 20 to 30 days. Excluding weekends, that’s once a month. Apple stock turns over about once a year.
Another way to say that is the average holding period for Tesla stock is about 25 days trading days, or five weeks including weekends.
Theoretically, no one holds Tesla stock for more than a month. Of course, there are some long-term holders, but accounting for that means the average holding period excluding Musk and long-term holders is even shorter.
Tesla’s trading volume, and trading value, are unusual. A strategist asked about the phenomenon didn’t have an answer about what it all means. It just is what it is.
It appears Tesla “is loved by traders, and Apple is loved by investors,” says Fairlead Strategies founder and market technician Katie Stockton. Technical stock market analysts look at charts to predict what’s coming next and typically deal with lots of traders.
Tesla’s “beta” versus the
S&P 500
is about 1.6 compared with Apple’s 1.1. Beta is a measure of volatility, relative to a market or an index. If the market is up 1% then a stock with a beta of one will be up 1%, too. “Higher volatility [tends] to appeal to short-term investors,” adds Stockton.
The post-earnings drop showed signs of “upside exhaustion,” she says. In the three months leading into earnings, Tesla stock is up more than 60%. Stockton sees $243 as support for the stock. That would still leave shares up almost 100% for the year.
One thing excessive trading does is eat away at investors’ potential long-term gains. Even Barron’s falls victim to the Tesla trading volume problem. We wrote positively about Tesla stock in January, and we typically have a one-year time horizon for our stock picks and pans. Tesla stock doubled in the weeks following the article, way faster than we expected, and we recommended selling some. Since that call, Tesla stock is up even more.
Trading around a portfolio position is one way to manage volatility, even for long-term holders. Another strategy for long-term holders is to do nothing and just endure the ups and downs. Over many years, that’s the superior strategy.
Tesla stock finished down 1.1% Friday at $260.02, down almost 8% for the week. The S&P 500 finished flat and
Nasdaq Composite
gained 0.2%.
Write to Al Root at [email protected]
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