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How to Trade Tesla with ETFs Ahead of Earnings?

Sweta Killa

Electric carmaker Tesla Motors TSLA is scheduled to report second-quarter 2017 results on August 2 after market close. Let’s take a closer look to its fundamentals ahead of its earnings.

Tesla has surged nearly 51.4% in the year-to-date timeframe, crushing the industry’s gains. After hitting an all-time high in late June, the stock has been on a tumultuous ride, shedding 16.4%. Lower-than-expected delivery numbers and worse-than-expected performance on a vehicle safety test dragged shares of Tesla lower (see: all the Alternative Energy ETFs here).

The weak trend might continue as Tesla has less chances of beating estimates this quarter and has seen a negative earnings revisions ahead of its Q2 report.

Earnings Whispers

Tesla has a Zacks Rank #3 (Hold) and an Earnings ESP of -18.50%, indicating less chances of beating estimates this quarter. According to our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 when combined with a positive Earnings ESP makes us confident in predicting an earnings beat. A Zacks Rank #4 or 5 (Sell rated) is best avoided going into the earnings announcement, especially when the company is seeing negative estimate revisions. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The company saw negative earnings estimate revision from a loss of $1.62 to a loss of $2.00 for the yet-to-be-reported quarter over the past 30 days. One analyst Goldman Sachs GS cut its full-year earnings outlook just two days before the earnings release. Analysts declining estimates right before earnings — with the most up-to-date information possible — is a not a good indicator.

Additionally, the earnings track record is also bad for the company with negative average earnings surprise of 29.89% for the last four quarters. Further, the Q3 Zacks Consensus Estimate reflects substantial earnings decline of 29.55% from the year-ago quarter. All these suggest more pain ahead.

Q2 Production Update

Earlier last month, Tesla reported weaker-than-expected vehicle sales growth for the second quarter. The automaker delivered over 22,000 vehicles (12,000 Model S and 10,000 Model X) during Q2, up 53% from the year-ago quarter but down 12% from Q1. Management cited that deliveries were hit by a "severe" production shortfall of 100 kWh battery packs, which are made by using new technologies on new production lines (read: Tesla Deliveries Decline: ETFs in Focus).

For the first half, total deliveries came to about 47,100 cars versus the company’s guidance of 47,000-50,000 cars. Provided global economic conditions do not deteriorate, Tesla expects deliveries in the second half to exceed the first-half number.

Model 3 on Radar This Earnings

Tesla launched $35,000 Model 3 on July 28 and promised to ramp up production at a phenomenal rate. The electric carmaker expects production to increase "exponentially" from around 100 cars in August and 1,500 in September to about 20,000 cars per month by December 2017.

Investors will be eagerly watching any development on the new Model 3 and how this car could boost sales growth in the second half of the year (read: 4 Sector ETFs Winning on Revenue Growth).

ETFs to Watch

Given this, ETFs having the highest allocation to this luxury carmaker will be in focus going into its earnings announcement. These funds are the potential movers if Tesla surprises the market.

VanEck Vectors Global Alternative Energy ETF GEX — The fund has surged 19.8% in the year-to-date time frame. Tesla occupies the third position accounting for 9.9% share.

ARK Industrial Innovation ETF ARKQ — The fund has delivered returns of 34.9% since the start of the year. Tesla takes the top spot with 9.4% allocation.

First Trust NASDAQ Clean Edge Green Energy Index Fund QCLN — It has gained 23% and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook. Here, Tesla takes the fifth spot with 7% share.

ARK Innovation ETF ARKK — This ETF has added 47.7% since the start of the year. Tesla is the second firm with 6.1% allocation.

Global X Lithium & Battery Tech ETF LIT – The fund has gained about 27% in the same time frame. Tesla occupies the fourth position and accounts for 5.8% share (read: How Tesla is Driving the Lithium ETF Higher).

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