As most of you aware, on December 21st Tesla will be included in the S&P 500 in one, fell swoop. This comes on the heels of a meteoric rise by Tesla, which is up an astonishing 574% year-to-date. This precipitous rise in its stock price has pushed its P/E ratio over 1,1100! These metrics should be extremely concerning to every savvy investor, even in the most attractive stock market. This sort of meteoric rise by an automaker that depends on consumer sales in the economic climate we face today should have investors running for the exists. We have record high unemployment, record high commercial vacancies, record high debt levels and record high stock market levels - all of which represent the potential perfect storm for stock market in the near future. To make things worse for Tesla, which makes electric vehicles, we have record low oil prices and a massive glut of available vehicles due to the collapse of the travel industry and subsequent downsizing and bankruptcies by the biggest rental agencies. Hertz alone flooded the market with over 700,000 vehicles due to their attempts at restructuring.
Just as Tesla's stock price has soared beyond all expectations this year as active fund managers and Robinhood traders poured into the momentum trade, it is, my opinion, poised for a massive move in the other direction at the first sign of trouble or uncertainty. Whether this bump in the road comes from an earnings miss or a wider market pullback fomented by the deep and varied economic problems facing the country, Tesla remains uniquely vulnerable to a larger and steeper pullback than almost any other stock being traded.
Trading stocks, like trading any other equity, currency or financial instrument, is all about managing risk. Making sure that there is more upside than downside. There are many people convinced that Tesla is bulletproof, and who are determined to ride Tesla all the way. Even if you are one who believes deeply in the future of Tesla and are holding on for the long haul, its worth considering buying some puts for downside protection so you don't go down with the ship if and when it hits the iceberg!