The Fortunes of Two Space Age Rocket Stocks: TSLA and MBIA

Just a couple of items, friends, before we get carried away and all hell breaks loose.
The first issue is Tesla (NASDAQ: TSLA), the company that built a magic car that flies you to the moon and back and pays you cash money for your trouble.

We believe this company has a future – don’t get us wrong. We don’t know how much of a future, but let’s agree that for at least a couple of years Tesla should produce, market and sell more cars than it does today.

That said, we’re not so sure that the company’s stock has a great future – over the near term, at least.

How dare you question TSLA!? Swine! Rebel! Heretic! Doubter!

Before we get to the cold hard facts, please hold your tomatoes and take a look at the company’s chart.

It may look like the Mona Lisa to Tesla bulls, but…

BB03061422-e1394135078228

There’s not a lot to be said after a touch of the RSI overbought 80 line (black circle, at bottom). Technically, such an occurrence bodes ill for a stock and calls for a pause in the buying, at least. At worst, it means a selloff could be near.

And yes, we can see that TSLA shares have twice hit the RSI 80 line over the last twelve months, and that the stock continued to climb to its current all-time highs, so a buy-and-hold strategy may, indeed, have worked out best for Tesla bulls. No argument there.

But please also be aware that while the first breach of RSI 80 in May of 2013 resulted in no material damage to the stock, the second produced a two month, 40% decline (October/November, 2013). And that’s what we call 50-50, historically-based odds.

Or, to bring it right down to earth – what this latest overbought reading will bring is anybody’s guess.

Our feeling on the matter is that the big money sees the nearly 800% gain over the last five quarters and will now begin to take cash off the Tesla table – particularly after the RSI overbought read and a recent unrealistic jump of 35% in just seven trading sessions.

And what about those cold, hard TSLA facts you mentioned?

Right. Consider –

  • With its latest rise, TSLA now possesses a market capitalization of $31.1 billion, while
  • General Motors possesses a market cap of $58 billion, and
  • Ford Motor Company sports a $60 billion market cap.

Hmmm…

Do those numbers bother you? They wouldn’t be such a big deal if sales numbers were in the same ballpark, but they’re not.

Tesla’s full year, 2013 sales totalled $2 billion, while GM’s topped $155 billion and Ford’s exceeded $139 billion.

Hmmm… Hmmm… (double Hmmm…)

Oh, we know, Tesla’s share price is discounting future earnings and all the enterprise and revolution value built into the shares, because, as we’ve said before, Tesla will shortly discover a cure for death itself, adding tremendous additional bloatage to its already pneumatic earnings multiple.
In short,

We now turn our attention from the imminent, fiery implosion of a certain car stock to focus on one of the latest rocket shots of the financial sector.

It’s a company we happened to mention just a week ago in a letter called The Coming MBIA Bubble.

The company, of course, was bond insurer MBIA Inc. (NYSE:MBI), about whom we wrote –

Today we’re looking at a technical formation that we believe could send the stock orbital again in the near term. With the head and shoulders top now behind us, higher prices appear to be a shoo-in. And if history (and a century of technical analysis) is any guide, we could see much higher prices. Why? Because a broken head and shoulders top is a reliable reversal pattern and a harbinger of steep price rises. All of which is why we would tend toward aggressive bullish betting on MBIA’s prospects for both the near- and intermediate-term.

We wrote those prescient words one week ago, when the stock was trading at $13.20.

And what happened?

BB03061455-e1394135066295

MBI Head and Shoulders Pattern

Shares of MBIA shot up to $15.08, a rise of over 14% in just five trading sessions.
And for those of you who heeded our trade idea to make an aggressive bet on the company, you’re a whole lot richer today. Near term ATM CALL options returned at least 400%.

An overbought RSI read (in black) tells us it’s more than likely time to exit the trade.

Many happy returns,

Matt McAbby
Senior Analyst
Normandy Research

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