The Price Is Right

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What's going on?

Analysts at Citigroup and Morgan Stanley decided on Wednesday that Tesla’s shares are a decent deal all of a sudden.

What does this mean?

Investment banks don’t just deal in assets and cash: they also deal in recommendations. See, one of the services these institutions provide pro clients is expert advice on the “fair value” of shares. And to work that out, they get their in-house eggheads to do some deep-dive research, crunch the numbers, and settle on a value that they can compare with the firm’s actual share price. Then they advise clients to buy, sell, or hold the company’s shares depending on the gap between the two. Now Tesla’s slipping share price has prompted Citigroup and Morgan Stanley to change their minds: Citi thinks the stock’s a hold, and Morgan Stanley, a buy.

Why should I care?

For you personally: Bucking the trend.
It’s against the rules, but leaned-on analysts can win their firms extra business, like juicy corporate advisory fees, by giving their stock price opinions some added va-va-voom. Stock prices tend to go up too, which means that a rare and often brave “sell” recommendation sticks out like a sore thumb, and is usually backed up by some well-founded opinions. So sure, Citigroup’s view on Tesla has only changed from hate to ambivalence, but a pivot in its gutsy opinion is worth clocking at the very least.

The bigger picture: A price for everything.
Good companies can be bad stocks, and bad companies can be good stocks. It sounds like a riddle, but Tesla can help us unravel how this conundrum plays out. See, most analysts do think Tesla’s a strong company, corporate culture aside – but some doubted whether the firm’s as entirely herculean as its stock price implies. The opposite can be true too, of course: even the most flawed firms can be diamond stocks if the price is low enough.

Originally posted as part of the Finimize daily email.

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