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The Trade: Book Profits on Tesla

The Trade: Book Profits on Tesla

[Full Disclosure: At the time of this writing Jeff Macke is long shares of Tesla (TSLA)]

Momentum stories end in tears. Maybe not today or tomorrow, but eventually. That doesn't mean you can't be involved in momentum stocks, just that you don't want to be onboard when the ride comes to a halt. After a mind-blowing 260% rally in 2013, shares of Tesla are running out of juice. It's time to take profits before the air-bags get deployed.

By the end of this week I'll be booking profits in my Tesla (TSLA) position. I've got three decent reasons why:

1. 240% in 6 months, 140% in 3 months, 20% in 1-month

Tesla isn't "priced for perfection." It's price has little to nothing whatsoever to do with fundamentals as we know them. TSLA shares are a reflection of the belief that Elon Musk will come up with something no one can currently imagine.

Given Musk's track record there's a pretty good chance he will but it's not going to happen tomorrow. Even genius needs an occasional pause.

2. No reason to buy except momentum

No one believed Tesla could build a decent car. Instead it built great car with the Model S, 2013's car of the year. People doubted Tesla could create practical refueling stations. Not only do those plans now look plausible but Musk claims Tesla is going to roll out battery swapping locations that give drivers a charged battery faster than you can fill a gas-guzzler.

But those aren't fundamental catalysts anymore. Baked-in catalysts make for half-bake investment ideas.

3. The shorts are already dead

Tesla shares have had two great bodies of indiscriminate buyers pushing the shares. One is organic retail buyers who believe in Musk. The other are the jaded institutional cynics who have been shorting the shares.

The shorts are dead, having been destroyed betting against the company on the basis of its secondary in May, the Goldman Sachs (GS) downgrade last week, and Musk's outrageous charisma. The players involved in Tesla at this point are all emboldened longs.

When there isn't anyone left to buy a stock all you have left are sellers.

Option Monster Jon Najarian, a self-described perpetually nervous long, gives the best argument for not touching shares in the attached clip.

Lumping Musk together with Twitter founder Jack Dorsey, Najarian pays Musk the ultimate compliment. "Only Jack Dorsey and Elon Musk deserve to be compared to Steven Jobs... These are guys that create mult-billion dollar valuations and they do it almost out of whole cloth, in other words just out of brain power."

To be clear I'm not betting against Musk. I'm betting I can get a better price for Tesla shares if I book my profits here and wait. The buy and hold forever set can do whatever they want. For a trade Tesla is wildly overbought. It has risk to $100 or even all the way back to it's $94 secondary price.

I'm not giving advice. With my real money in an honest portfolio I'll be selling shares of Tesla at some point at least 24 hours after this story is posted.

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