Colin’s Note: On Monday, we talked about how the next four weeks will be critical for the 2024 market…
And yesterday, we got a peek into what happens when a company falls short of expectations with Tesla’s tumble.
The next few weeks are going to test a lot of companies… and a lot of investors as well.
What do you do when one of your own investments pulls a Tesla? Do you cut your losses… or do you take advantage of an opportunity to buy at a discount?
Today, we’ll get into what’s really going on with the Tesla dive… And how you can use it as a guide as more companies go through dips over the coming weeks. Just click below for today’s video or read on for the transcript.
Bleeding Edge subscribers, hopefully, guys are doing well.
On Monday, we talked about how Wall Street expectations will be tested over the next four weeks. And yesterday, we kind of got our first look into what happens when a company comes up short.
Tesla, like all large automobile makers, reports its unit sales around the first of every month. And Tesla’s March sales were nothing short of a disaster.
The company reported negative sales figures for the first time in several years. This caused Wall Street and investors to reset expectations for the rest of the year.
Shares of Tesla fell about 5% on the day and are down more than 30% this year.
Now this is a classic case of a stock not meeting expectations and having Wall Street reset the valuation based on this new reality.
Chances are, Tesla won’t be the only stock that comes up short over the next couple of weeks. That’s why I’m declaring that the next four weeks will shape the markets for the rest of 2024.
But what happens when a stock that you own or potentially want to own performs like Tesla did? Do you immediately cut bait and sell the stock? Or do you take advantage of the lower share price and buy?
This is going to be a critical question that many investors face over the next four weeks. Today, using Tesla kind of as our base case or an example, I will give you a guide that you can follow over this next critical four-week period that we’re about to face in these markets.
First, we must determine whether the company’s current situation is permanent.
Wall Street analysts provide revenue estimates and targets for public companies… but here’s a little hint for you. These guys are lazy. Most rely on models – or essentially an Excel spreadsheet – with a range of estimates and outcomes that they have projected for the company.
You’d think most analysts would follow the news and adjust these expectations on the fly. But the truth is, most don’t.
One of my colleagues here at Brownstone Research says it best. He says if the data point doesn’t fit into an Excel worksheet, they simply don’t know what to do with it. And the truth is, Tesla’s sales decline was more than telegraphed over the past 30 days.
In March, Tesla’s European factory suffered an arson attack that shut down the production in that facility. The company is also rolling out a redesign of one of its top-selling models here in the United States. And the ongoing conflict in the Red Sea has caused critical components to be delayed.
So while Tesla surprised the market with these poor results, most of it was due to the fact Wall Street analysts hadn’t adjusted their models to reflect the challenges faced by Tesla over the past 30 days.
In this scenario, I’d be more than forgiving of Tesla’s decline because the challenges the company faced are unique and likely could be rectified later this year.
But now the more important question that we have comes to the surface… Do you buy Tesla simply because the expectations weren’t met?
To be brutally honest with you, the average retail investor would just snap and go buy Tesla. As we said on Monday, it’s far easier to buy a stock that is down 50% than one that is up 50%.
As consumers, we’re trained to look for deals. I do it all the time. We’re looking for sales. After all, who doesn’t like saving money and getting a good deal?
But this mindset really doesn’t work in the stock market. Unlike something that you buy in a store, buying a stock is different. When purchasing a stock, you’re investing in the anticipated cash flow, revenue, and profits the company will generate beyond expectations.
And that last part is the key… and the one that most investors ignore.
Tesla stock declined because it, understandably, missed expectations. For Tesla stock to go back up, it now must outperform those same expectations.
How a company does this going forward will vary by industry and sector, but most companies rely on innovation.
Over the past year, we’ve seen innovation in those GLP-1 drugs that are all the rage in weight loss communities. And they’ve sent shares of Eli Lilly and Novo Nordisk soaring. Innovation in artificial intelligence (AI) has sent shares of Nvidia, AMD, Supermicro, Microsoft, and many others soaring as well.
Yes, companies can raise prices or cut costs to improve their financial figures. They can also buy back the stock or increase the dividend. But innovation is what provides those huge payoffs that most investors are seeking.
With Tesla in particular, it’s not the electric vehicle that will provide that innovative growth going forward. EVs are amazing but are simply not for everybody.
Tesla will need its innovative energy and storage business, and more importantly, its robotics business to outperform above expectations for shares of Tesla to rise again.
Just like it was difficult for Wall Street to pencil in a factory shutdown or supply chain disruptions for Tesla in March, it’s even more difficult to protect future sales of projects that aren’t generating much revenue for the company yet.
Later this month, there’ll be a number of companies that fall like Tesla stock did based on poor sales expectations.
The critical question that you need to ask is, “Can the company innovate new products and services to beat expectations in the future?” If the answer is yes, you’ve likely uncovered a stock that is worth buying.
We’ll certainly keep you updated over the next several weeks as many companies are reporting earnings in a very short period.
As I’ve said before, it’s a critical four weeks. And we’ll be here to cover it for you on The Bleeding Edge. I hope you all have a wonderful day. We’ll see you again later this week.