Stocks to sell

Last Wednesday, we finally got the announcement:

Elon Musk had sold another $3.6 billion of Tesla (NASDAQ:TSLA) stock earlier in the week. (SEC filings tend to lag several days behind transactions).

Such a sale had been months in the making. Not only did Mr. Musk likely overpay for his Twitter acquisition. A series of unforced errors has turned the social media company into a cash-burning furnace. The world’s formerly richest person has now sold $22.6 billion Tesla stock since April… And still has around $3.1 billion in miscellaneous liabilities, according to the Bloomberg Billionaires Index.

Let that sink in. 

Yet, the big headlines also obscure a non-laughing matter: Mr. Musk chose to sell his Tesla shares outright rather than use them as loan collateral as Morgan Stanley allegedly floated.

And that’s a big difference.

If past is prologue, Elon Musk is signaling to get out of TSLA stock now.

The Genius of Market Timing

CEOs and other executives routinely trade shares of their own companies. It’s a strategy that typically leads to a 15% outperformance and is the basis of my Insider Track strategy. $200,000 invested at that rate would be worth almost $15 million only 20 years later. Plenty to retire on, and enough to buy a cheap social media site of your own.

The strategy is also entirely legal for the executives and those who mirror their trades. As long as executives 1) avoid trading during “blackout” periods immediately preceding earnings releases and 2) report their transactions to the SEC in a timely manner, they can use their personal knowledge of the business to profit as they please. Investors like you and me can use these SEC filings to mimic these gains with surprisingly little slippage.

Some individuals take these SEC-granted freedoms to extremes. A 2021 report by the Wall Street Journal found dozens of federal judges who traded stocks of litigants during cases. One such judge bought thousands of dollars of Medtronic (NYSE:MDT) while overseeing a lawsuit involving a potentially defective Medtronic graft implanted into a 12-year-old boy. The case was dismissed, and shares of the medical device firm rose by double digits.

Others simply follow along. I’ve also used the strategy to identify big winners like Longeveron (NASDAQ:LGVN) — a company that returned almost 1,000% in three months on a “surprise” FDA authorization. Some gold miners have also done quite well after “discovering” new veins after insider purchasing.

And that brings us to Elon Musk, a genius stock market timer.

How to Earn Millions Without Really Trying

In 2017, Elon Musk began scooping up large chunks of Tesla’s beaten-down shares. The electric vehicle maker was on track to lose $2.2 billion that year and liquidity was becoming a concern.

Within three months of his $35 million purchase (these were the old days before he was worth hundreds of billions), Mr. Musk would announce that he had reached a blockbuster deal to refinance his firm. Tesla would raise $1.8 billion in bonds, and rising shares would award Mr. Musk a windfall profit.

Tesla’s CEO would use a similar strategy in 2018 after buying $25 million more in shares… and then announcing plans to take the company private. Another series of well-timed buys in May 2019 and February 2020 would rise between 206% and 235%. These were some of the most profitable trades tracked by TipRanks.

In late 2021, however, Mr. Musk’s tack began to change. Rather than buy stock, he began to sell.

And he sold a great deal.

At that point, I had already turned bearish about Tesla eleven months earlier. “It’s time to take profits on Tesla,” I wrote in January of that year. “Bullish dreamers have turned Tesla stock into an outright fantasy.”

Mr. Musk’s timing was even better than mine. Had investors waited until November to sell, they would have earned an extra 40% on the way up for their troubles. A C-suite role — it turns out — makes people excellent at trading stocks of their companies. And Elon Musk has routinely (and gleefully) profited from his position.

Sale Vs. Loan: Musk Now a TSLA Stock Bear

That’s why Mr. Musk’s latest share sales should concern even the most rabid Tesla fan. Sales in 2021 and 2022 typically preceded bad news about Chinese demand… or release date delays… or becoming a CEO of a giant social media firm. He hasn’t been wrong before.

In October, he warned by tweet that a recession could continue “until the spring of ’24.” Sales in China — which accounts for 50% of revenue — are noticeably slowing down. And as I wrote in my 2021 note (which is still true today), Tesla’s high valuation “means its earnings potential will take years to catch up to its share price.”

As 2023 approaches, the car firm is still worth almost $500 billion, 10 times greater than Ford (NYSE:F). And even if it does meet its aggressive cash flow targets for 2023, shares are still priced at over 30X that figure.

The matter is made worse because Mr. Musk had a choice not to sell shares. Tesla’s proxy rules allow him to pledge shares of his company as collateral for loans, allowing him to raise cash without liquidating a single shred of equity. Closed-door negotiations also suggest that Morgan Stanley offered to provide margin loans for Mr. Musk.

He decided to sell anyway.

Of course, both Mr. Musk and I could be wrong about taking profits on Tesla shares today. Demand for electric vehicles is only going up, and Tesla remains a favored brand among the high-end players. And no person — not even Mr. Musk — can beat the market every time.

But for those who like betting “odds on,” consider Mr. Musk’s massive share sales a warning that it’s time to take profits on TSLA stock.

On the date of publication, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tom Yeung is a market analyst and portfolio manager of the Omnia Portfolio, the highest-tier subscription at InvestorPlace. He is the former editor of Tom Yeung’s Profit & Protection, a free e-letter about investing to profit in good times and protecting gains during the bad.