You are here

Unconventional Auto Stock Could be Your Ticket to 20% Profits in 3-4 Months

When your chief competitor in a niche market sees its founder and CEO resign, it's usually a pretty good indication you're going to benefit.

That is precisely what happened this week in the specialty market of luxury electric vehicles. Privately held Fisker Automotive founder Henrik Fisker quit his post due to disagreements with the company's management team over reported talks of shopping a majority stake in his namesake firm to a Chinese company. In my opinion, this represents a big victory in the fight for dominance in the space for rival Tesla Motors (NASDAQ: TSLA).

In contrast to the situation with Fisker, Tesla's billionaire co-founder and CEO Elon Musk doesn't appear to be going anywhere. In fact, Musk is one of those rare breed of leaders who, through the force of his intelligence, personality and vision, has managed to create a company that could redefine the entire automotive industry.

He's also managed to make a lot of investors very happy along the way.

On the auto front, in November, the Tesla Model S sedan was the first ever non-combustion engine vehicle to win the prestigious Motor Trend Car of the Year award. The company captured the top honor after a series of torturous 10-day stress and performance tests conducted by Motor Trend editors and auto industry veterans. The Model S came out on top of a 45-car field due to what the magazine described as the Model S' superb acceleration, handling, open cabin and 250-mile range.

On the stock front, shares of Tesla have driven substantially higher, particularly since November. The stock soared some 38% from Nov. 1 through March 13, and along the way, blasted through technical resistance at the 50-day and 200-day moving averages.

Tesla Stock Chart

As you can see in the chart above, the road higher in 2013 (up more than 11% year to date through March 13) has not been without a few big potholes.

In February, the company saw its shares drop precipitously after releasing its fourth-quarter earnings results. The metrics showed that Tesla missed bottom-line expectations, with an adjusted loss of $0.65 per share versus adjusted EPS forecasts for a loss of $0.53. The company did manage to best top-line estimates, seeing revenue of $306.3 million versus estimates of $298.9 million.

In the conference call accompanying the Q4 results, Musk said that he expected the company to become profitable earlier than originally anticipated. In a letter to shareholders, Musk wrote, "We expect to be slightly profitable (excluding only non-cash option and warrant-related expenses) in Q1 2013." Most auto industry watchers aren't expecting Tesla to turn a profit until at least the third quarter.

After the post-earnings slide, the stock resumed its upward momentum and rose to a high of $39.49 on March 13, just shy of its 52-week high of $40, which was made in February. Since then, the stock has dropped below $36, and could continue to be dragged down with the broader market today.

I think that despite its volatility, and despite the fact that it's a favorite of short sellers, TSLA is the kind of stock that will continue to be a great momentum play for traders.

The company's high-quality, and potentially industry-changing, vehicles have proven to be popular and highly sought after, and soon Tesla will be making money selling all-electric cars, something green energy proponents could have only dreamed of a few short years ago.

For traders, I think TSLA shares represent a great way to drive some solid profits into your portfolio, especially if you scoop them up on the recent pullback.

Recommended Trade Setup:

-- Buy TSLA at the market price
-- Set stop-loss at $32.15, approximately 10% below the current price
-- Set initial price target at $ 42.80 for a potential 20% gain in 3-4 months