NEW YORK (TheStreet) -- "Buy the rumor, sell the fact" is an old adage on Wall Street for a compelling reason -- once an event happens, it's already priced in. However, investors should remain cautious about the rumor of Apple (AAPL) buying Tesla motors (TSLA) anytime soon.
"There are no coincidences on Wall Street" is another old Wall Street saying more appropriate to Tesla's latest buyout rumor. Tesla reports earnings after the close on Thursday and the consensus estimate is 18 cents a share. Don't think for a second it's just coincidence an alleged meeting between Apple's acquisitions chief and Elon Musk, occurring about a year ago, is plastered all over the news right now.
Keep in mind that Tesla's valuation doesn't come from earnings or dividends but anticipation of possible future earnings from expected growth.Based on current sales and profits, the stock is worth about $20 if valued as its peers. If the disparity between current earnings and future expectations appears wide, it is.
At around $205 a share, Tesla's market cap stretches into the $25 billion range. For perspective, General Motors (GM)'s market cap is $57 billion, and Ford (F) is $60 billion. The numbers become eye-poppingly relevant when you consider Tesla's trailing 12-month revenue is $1.7 billion versus $111 billion and $146 billion for GM and Ford, respectively.
In other words, Tesla needs to grow revenue about 80 times the current size for its shares to be similarly priced to its peers.
We can look at Tesla's earnings in comparison, but Tesla doesn't produce a profit -- not operationally anyway. Even before removing tax credits, arriving at a $25 billion market cap requires financial accounting gymnastics beyond my (and many others') ability -- so much so that about one out of every three shares is shorted.
A shorted stock is one that an investor believes is so mispriced by the market that it's advantageous to borrow shares and sell them on the open market. A short seller is (usually) required to buy the shares back at a later time in order to return them to the lender.
I short stocks almost every day, and yet I rarely find companies with short interest over 30% unless it appears the company may have its lights turned off at any moment. No one thinks Tesla is about to go out of business, but clearly the smart money firmly believes the shares have a lot of room to the downside. How much downside investors risk is primarily determined by growth, as stated earlier, but the results from operations will have an influence also.
The market is pricing in a four-cent beat of the estimate, or 22 cents a share based on several whisper numbers. That means if the company reports 20 cents, a number that appears strong, don't expect a price jump, all else being equal.
With Tesla at record highs in front of earnings and many non-financial news reports that Apple may consider buying the automaker based on meetings from a year ago, it appears the timing is an exit strategy for Wall Street. Don't buy into it and don't become a remorseful bag-holder buying at the top.
At the time of publication, Weinstein had no positions in securities mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.