Many on Wall Street advocate the "buy low, sell high" strategy. While Tesla (TSLA) is certainly well below highs, it's not a good idea to buy a stock that's in a clear downtrend. The current action for Tesla stock shows us why it's important to analyze the stock chart before buying into a company's long-term story.
Tesla stock plunged 8.2% to close at 267.78 on the stock market today after the company missed first-quarter delivery expectations. Even before Thursday's heavy-volume decline, the stock chart wasn't painting a very pretty picture.
Looking at a weekly chart for Tesla stock, shares are hitting resistance at the downward-sloping 10-week moving average. And the electric-car maker has been in a pronounced downtrend for more than three months.
This action comes after four failed breakouts in a row for Tesla. Each time Tesla tried to break out of a chart pattern since September 2017, the stock quickly turned tail. That's not a good sign.
Stocks To Buy: Key Traits
When looking at stocks to buy, Investor's Business Daily checks for leading stocks that are in uptrends, and Tesla is in a clear downtrend. We also want to see stocks holding above the 10-week line and finding support there, rather than hitting resistance like Tesla.
We also use the relative strength line, which measures price performance vs. the S&P 500, to help us determine market leadership and see which stocks are outperforming the market. The relative strength line for Tesla stock is in a sharp decline, meaning it's vastly underperforming the market.
You don't want to put your capital to work in stocks that are underperforming the market. There's a much greater chance of scoring big gains by focusing on leading stocks. Rather than "buying low and selling high," savvy investors should think about "buying high and selling higher."
Tesla Earnings Outlook
Looking at a stock's fundamentals is also key. Tesla has a history of struggling with profitability and has logged many quarters of losses. The electric-car maker was able to turn a profit in the two most recent quarters.
However, there are still concerns about profitability, with Tesla selling fewer cars in the first quarter than expected. Also, Tesla already said it likely would post a loss in the first quarter.
Top growth stocks typically show a track record of solid earnings growth of 25% or more, and it's even better when that growth shows acceleration.