Tesla Motors Inc (NASDAQ:TSLA)’s Elon Musk has captivated us with his extraordinary accomplishments. He has helped to revolutionize electronic cash through PayPal, his private Space Exploration Technologies (SpaceX), provides transportation to the International Space Station for NASA, and his car company, Tesla, just won the “Triple Crown of Auto Manufacturing.”
Tesla’s Model S received the highest reviews ever from Consumer Reports and the National Highway Safety Administration, after being named Motor Trend’s 2013 Car of the Year. And all of the above doesn’t include Musk’s innovations in SolarCity Corp (NASDAQ:SCTY) and the Hyperloop. Investors are now glued to Musk’s every move to see what the world’s top genius will do next.
Buy and hold, trade, or sell short?
While Tesla and SolarCity Corp are the most efficient way to participate in Musk’s success, both of these public companies are currently up this year by over 380% and 190%, respectively. So what is an investor to do now? Buy and hold, trade, or sell short?
At ETF Portfolio Management (ETF PM), we specialize in strategies that use leading exchange-traded funds (ETFs) to maximize investment results. However, on occasion, we find extraordinary individual growth companies that we do purchase on behalf of clients. And earlier this year, Tesla made the list.
Don't Bet Against Tesla's Founder
This past May, we emailed our clients and prospects saying, “Tesla is now our favorite individual stock pick. It is rare that we recommend an individual company this strongly.” Many of our clients now own Tesla as a small, passive long-term investment, and some clients have larger exposure through our discretionary efforts where we hedge the position at times.
Everyone following these stocks is struggling to determine how much to buy, when to sell, and/or sell short. However, nobody can predict what these stocks will do next. In our opinion, investors should only allocate capital to individual stocks that they can afford to lose. Both of these companies can quickly fall by well over 10% to 50% if something adverse happens or if investors take profits.
That said, a 1% to 3% portfolio allocation to these companies could be a great long-term investment, even from current levels. Given Mr. Musk’s recent comments about Tesla’s stock price, we hedged our discretionary exposure to the company at $163. Depending on the stock’s performance, we plan to re-enter our discretionary Tesla position below $155 as soon as possible. Our discretionary stock allocations currently do not have any exposure to SolarCity.
As for shorting these companies, that is a most dangerous proposition. Betting against Mr. Musk is clearly an effort in “picking up pennies in front of a train.” However, all of the investors shorting the stock are helping to fuel even greater returns for the Tesla bulls. In fact, our temporary hedging efforts may prove to be an expense long-term, especially if the stock doesn’t pull-back to our target re-entry price.
Regardless, we can all say “Bravo Mr. Musk.” Your efforts to preserve humanity through multi-planetary human life are extraordinary! Thank you, and keep up the great work!
David S. Kreinces is the Founder of ETF Portfolio Management (ETF PM), a revolutionary financial advisory firm that specializes in rules-based investing and risk control. He has over 20 years of professional investment experience in multiple asset classes and investment processes. He is an expert in ETF trend following and has successfully delivered gains in the market crash of 2008. ETF PM also gives back to the community through a pledge to donate a portion of each client’s annual advisory fee. See www.etfpm.com and www.InvestableBenchmarks.com