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Tesla Must Deliver! Zacks DEC Market Strategy

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The following is an excerpt from Zacks Chief Strategist John Blank’s full Dec Market Strategy report To access the full PDF, click here.

On Nov. 30th, the Wall Street Journal shared -- the 1st major share price risk for 2021.

S&P Dow Jones Indices said it will add Tesla’s (TSLA - Free Report) full weight to the S&P 500 all at once in December, shedding more light on a mammoth addition that has captivated investors across Wall Street.

The index company said Tesla will be added to the broad stock-market gauge before the start of trading Dec. 21st, meaning most index-tracking funds that follow the S&P 500 will engage in a flurry of trading the Friday before.

Tesla’s market value has ballooned to about $538 billion, making it the sixth largest company in the U.S. stock market, and it would have more than a 1% weighting in the S&P 500. That puts it ahead of Berkshire Hathaway Inc. but behind Facebook Inc.

More than $100 billion will be put in motion in coming weeks as passive fund managers and some actively traded mutual funds all benchmarked to the S&P 500 adjust their portfolios to make room for it, traders and fund managers say.

Weaving Tesla into the S&P 500 means shifting weightings of many other stocks to include the electric-vehicle maker.

In a Y-chart (above), you can see the “Top Six” S&P 500 components by market cap – now including Tesla – are on the right. The bottom 369 names are on the left.

Next, in a new email sent to Tesla employees on December 1st 2020 and obtained by Electrek, Elon Musk warned that Tesla needs to be at work on delivering future profits:

“At a time like this, when our stock is reaching new highs, it may seem as though spending carefully is not as important. This is definitely not true.

“When looking at our actual profitability, it is very low at around 1% for the past year. Investors are giving us a lot of credit for future profits, but if, at any point, they conclude that’s not going to happen, our stock will immediately get crushed like a soufflé under a sledgehammer!

“Much more important, in order to make our cars affordable, we have to get smarter about how we spend money. This a tough Game of Pennies – requiring thousands of good ideas to improve part cost, a factory process or simply the design, while increasing quality and capabilities. A great idea would be on that saves $5, but the vast majority are 50 cents here or 20 cents there.

“In order to make the electric revolution happen we must make electric cars, stationary batteries and solar affordable to all.

“Thanks and great working with you as always.” – Elon


What Does Zacks Have on Tesla – as a Stock?

We show a Growth score of A, but a Value score of F. The Auto Industry is currently ranked #25 out of 254 (Top 10%). The short-term score is a Zacks #3 (HOLD) rating.

Our Price, Consensus, and Surprise Chart for Tesla shows the massive blow-up in the share price. Consensus sees $2.18 a share in 2020 and $3.49 in 2021. These EPS estimates derive from 12 analysts. So, the data are a worthy consensus to draw from.

Tesla Price, Consensus, & Surprise Chart

Source: Zacks.com

Note: I see 5 consecutive quarterly EPS surprises put up by the company. As Elon stated, they must keep delivering… or their stock’s price will get pounded down.

Zacks December Sector/Industry/Company Telescope

Zacks Industry Ranks show us what happens when the U.S. economy hits a soft spot, and the spending is focused on a few main areas.

Consumer Discretionary is tops this month. COVID has a trifecta of strong spending spots that hit home.

Two internationally exposed sectors – Materials and Info Tech – led again. Think about buying into Paper, Containers & Glass, Semis and Electronics.

The Financial sector fell back, as did Health Care, and Energy. Are the solar plays overbought? I think so.

What to make of Telcos and Utilities? Unattractive defensives, as usual when there is a strong stock market led rally.

(1) Consumer Discretionary stayed Very Attractive. Apparel, Home Furnishing-Appliance and Autos/Tires/Trucks represent the COVID triple play here.

Zacks #1 Rank (STRONG BUY) Stock: L Brands, Inc. (LB - Free Report)

(2) Materials fell to Attractive from Very Attractive. Paper and Containers & Glass look best, in a nod to Internet-driven shipping.

Zacks #1 Rank (STRONG BUY) Stock: International Paper (IP - Free Report)

(3) Info Tech fell back to Attractive from Very Attractive. Misc. Tech, the Semis and Electronics look the best.

Zacks #1 Rank (STRONG BUY) Stock: Brother Industries Ltd. (BRTHY - Free Report)

(4) Industrials fell to Market Weight from Very Attractive. Construction Building-Services, Conglomerates, and Machinery were the top industries.

(5) Financials fell to Market Weight from Very Attractive. Investment Banking and Banks & Thrifts look good. Higher rates can help these types of entities.

(6) Consumer Staples fell back to Market Weight from Attractive. Consumer Product-Misc. Staples, & Agribusiness are the two most attractive industries.

(7) Health Care fell to Unattractive from Attractive. Medical Products led.

(8) Communications Services fell to Unattractive from Market Weight. Misc. Staples was a strong spot.

(9) Utilities sunk to Unattractive from Market Weight.

(10) Energy fell to Very Unattractive from Unattractive.

Conclusion

We likely enter 2021 with a U.S. share price melt-up going on.

  • The S&P 500 forward 12-month P/E is 21.7.
  • The 5-year F12m valuation average? It is 17.4.
  • The 10-year F12m average? It is 15.6.
     

That is an over-stretched setup.

Then, S&P/Dow Jones Indices slips a momentum stock like Tesla – with a 12-month forward P/E of 261 – into the mix at a full portfolio weight.

This is regarded as the most heavily-benchmarked U.S. large cap share index.

Voila!

There’s your first major share price risk for 2021.

Happy Trading and Investing!

Regards,

John Blank

 

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