It’s hard to escape coverage of the recent rally in Tesla (NASDAQ:TSLA) stock. The company has earned the title “Mother of All Momentum Stocks” in my book for 2020. Just yesterday morning it spiked over $100 out of nowhere. There are other stocks that also move fast and today we’re going to discuss two more including Facebook (NASDAQ:FB) and Beyond Meat (NASDAQ:BYND).
But first it is important to acknowledge that the equity markets are at all-time highs in spite of a lot of lingering issues. Mainly the impending economic impact of the coronavirus from China. There is no doubt that the next set of profit-and-loss statements will be hit hard especially in Asia.
Furthermore, for decades China has been the global growth engine. So by shutting it down effectively for over two months it will definitely ripple through the rest of the world as well. So buying any stock at all-time highs is risky enough, let alone momentum ones that have had such rallies already. The potential of an overall pullback is serious to each individual ticker we discuss today.
Momentum stocks are difficult to trade because they move fast. On the way up they look like they’re always waiting to correct, and on the way down appear falling into the abyss. So using tight stop losses is definitely proper procedure when trading them.
Stock To Trade In This Bullish Market: Beyond Mean (BYND)
The craze of the stock of Beyond Meat has died down a little bit. But the stock still has a very high short interest of 35% of float. This is twice as much as Tesla, so at any point in time it could see a short-covering spike. However there are no imminent signs of that happening. In early January it had its crazy moment as it spiked 70% in panic. BYND stock jumped from $74 to $130 in hours. Usually when that happens once, the investor’s get savvy for the next time thereby reducing the odds of recurrence.
The concept of alternative solutions to meat is viable. The world is ready to consume realistic fake meat that looks and taste like meat. It is humane and could help save the planet. But for now there is no proof that BYND is the company to make it ubiquitous. From a valuation perspective, the stock is expensive so it has a lot of hopium built into the price. Management has to deliver incredible growth in order to grow into the valuation.
My assessment of value is not the typical price-to-earnings ratio but rather the fact that it sells at 80 times its sales. That is a lot of growth to conjure up. It being expensive is not reason enough to short it because they’re supposed to spend a lot in order to grow a lot. But if that slows, it becomes a problem for Wall Street and they will reprice it. Until then I give it the benefit of the doubt, and I would chase the upside when they close above $137 per share. When that happens the target becomes $180 with resistance at $159 per share. The bulls also need to defend $100 well, which makes for a better entry point than here.
Facebook (FB)
I am a fan of Facebook stock even though I don’t use the platform much. The company has become a behemoth in the advertising arena. Their clients love the results they deliver. I know firsthand business people who ditched all other marketing venues including Google’s pay-per-click and are completely dependent on Facebook advertising for their businesses. They swear that the results are fantastic. This would explain the resilience that the stock has shown even through tremendous privacy and fake news scrutiny that plague it. Investors have not been scared away by the headlines.
Recently FB stock triggered several bullish patterns most notably from $200 per share. At $220 it has filled the measured target. So from a trading perspective, this was a place to trim the short-term bets leaving the long-term ones intact. This is the difference between trading and investing. At these levels, FB is not at an obvious starting point for new positions. It is better to wait and miss out on a few upside dollars so not to get in near a potential top.
Above $219 per share there is a cluster of failures. This is potential resistance but also is the next trigger for more upside. So onus is on the bulls to overcome it and start using it as forward support. Often it is wise to wait for confirmation of the break-out rather than anticipate it and buy too early.
In short I like holding Facebook for the long-term but I bet that we will have better entry points than now. Chasing the breakout above said resistance would also work for a trade.
Tesla (TSLA)
I doubt that anyone knows exactly what’s going on with Tesla stock. I met dozens of bulls who can justify the move as upside potential for the coming years yet nothing specific. But this form of repricing a stock is rare, perhaps too rare. I fail to see the urgency to triple the stock price in such a short period of time.
As a car maker it is very expensive, but the thesis for the stock is that it is a technology company. Some even call it an energy company. Ron Baron even claimed on CNBC that Tesla CEO Elon Musk is ‘saving the world.’ He also sees it hitting $1 trillion in revenues in 10 years. This to me conjures up images of Elon walking on water next. So I find that a bit of an exaggeration, though I’m sure just my saying so will upset a few readers. So I digress.
I get the enthusiasm for the Tesla story. They could end up having multiple income streams that will differentiate them from say General Motors (NYSE:GM) or Ford (NYSE:F). But I fear that they don’t showcase those enough in the discussions nowadays. The predominant jubilation are about how many vehicles they can produce and where. So buying TSLA stock near $1,000 per share is definitely not a no-brainer.
Sentiment Matters
I debated the company over social media and the level of hate that I received was astonishing even when my position was mild. In one instance I stated that ‘it is a momentum stock’ and even that earned me a nasty comment from a fan. So let this be an unofficial sentiment gauge; there is too much love in the stock here. I admit that I am missing a piece of the puzzle, so I still would rather sit out the potential upside and watch the story unfold. I bet that there will be better entry points than $950 per share. This is a stock that is too high to chase and too hot to short.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.