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Bull of the Day: Tesla (TSLA)

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Bull of the Day: Tesla (TSLA - Free Report) This battleground stock has seen increasing estimates and short covering, expect that trend to continue.

Tesla (TSLA - Free Report) is a Zacks Rank #1 (Strong Buy) and sports a growth style score of A.  Today it is the Bull of the Day, and this article will explain why it achieved this designation.

By now, most investors have heard of the electric car company and or its CEO, Elon Musk.  Plenty has been written about the Titanic short squeeze that the bulls see coming (https://www.zacks.com/commentary/168627/why-tesla-shorts-are-doomed) and there are several other sources for negative articles as well.

Why The Bull?

Let's face it, you cannot believe everything you see on Twitter about TSLA, and there are plenty of publications that have posted complete lies about the company and its CEO.  None of those things have any merit on why this stock is the Bull of the Day.

The Bull of the Day is written each day on one stock that has a Zacks Rank #1 (Strong Buy), but that begs the question of how it obtained such a strong Zacks Rank.

The Zacks Rank is an algorithm that looks and the revisions of earnings estimates from all the research providers that submit earnings estimates to Zacks.  So the Rank can move if estimates from big investment banks like Needham or Goldman Sachs or Wedbush change their numbers.

All the other earnings estimate revisions for all the other stocks in the Zacks universe are then ranked, and the best estimate revisions achieve the Zacks Rank #1 (Strong Buy).

So Why Are Estimates Moving Higher?

Estimates are moving higher and that is not a debatable fact.  The better question is why are they moving that way? Clearly, execution of the plan is helping the company and they are probably going to sell more cars.  I don't have a model or an estimate of cars sold... I leave that to the analysts that submit earnings estimates.

What I do deal with is a broad brush.  I take in what I see, the generalities and the trends and merge that with the mesh of numbers that analysts provide.  From there I can make my own decision on the future of a stock.  

What I see with TSLA if very straightforward.  Earnings estimates are moving higher because they can build more cars and are selling them for more money than expected.  Simple as that.

The Stock

The bears are starting to see it that way too.  This is evidenced by the fact that there has been a lot of short covering lately.  We can see that the number of shares short has decreased by 5% from the most recent report to the current level.

That number is a little dated and available on the NASDAQ site.  But the recent move to $380 certainly brought out more short covering... and maybe some new shorts as well, but in the end probably more covering.

The last week or so has been rough on the stock, with it falling from $380 to $320.  There were plenty of suggestions that $380 was a level at which smaller shorts were put in margin calls.  This is hard to know if it is in fact true, but clearly sets a line of demarcation.  

TSLA over $400 

With the battle lines set, the question is what happens when the inevitable hits?  What happens when the numbers continue to improve for TSLA and the stock surges through the $380 battle line and crosses $400?

That will trigger a huge tidal wave of cover and a few market professionals that I have spoken with expect that a sustained move over $400 will propel the stock to $440 in a very small period of time.  I am in that camp as well.

Estimates

Since this is the bull of the day, I wanted to speak to the moves in earnings estimates.

The Zacks Consensus Estimate for this year has moved from a loss of $6.69 to a loss of $1.23 in the last 90 days.  I'll do the math for you, that is an improvement of $5.46 in earnings.  What had to happen to all the models for the CONSENSUS number to improve so much?

The Zacks Consensus Estimate for next year - which most investors are fully focused on - looks even better.  90 days ago it was calling for a gain of $1.19 and now that number has soared to $5.88.

Some quick math for you on the last 90 days and the estimate for 2019.  The number moved up by $4.69.  That is a percentage increase of 394%.  

I cannot think of any instances where the next fiscal year sees increases of 300% or more when the company has posted sales of $10B or more.  It simply doesn't happen all that often... but it is happening right now at TSLA.

Full Disclosure

I have been long and will continue to be long TSLA in my trading account and in my IRA.  

Chart

Tesla, Inc. Price, Consensus and EPS Surprise

Tesla, Inc. Price, Consensus and EPS Surprise | Tesla, Inc. Quote

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