The Real Reason That Stocks Like Tesla And Palantir Are a Rollercoaster Ride

There’s more noise around Wall Street than ever before. It’s going to get worse once earnings season starts in a few weeks.

Especially where volatile stocks like Tesla Inc. (NASDAQ:TSLA) and Palantir Technologies Inc. (NYSE:PLTR) are concerned, it’s essential to be able to distinguish empty chatter from real market-moving news.

Yesterday, for example, PLTR dropped 1% against a slight gain for the S&P 500. Suddenly, everyone who wanted to earn a few bucks started speculating about why the stock was moving in the wrong direction.

Nobody had a truly compelling explanation. But investors who wanted to make sure they weren’t missing still needed to click on all the headlines and see for themselves.

It can be a huge waste of time. The real secret of the market is that stocks like PLTR are simply controversial. There’s no consensus yet as to what they’re worth.

TSLA is another great example of a stock in which opinions stretch across extremes. The biggest bull on Wall Street has gone on record arguing that this will be a $1,470 stock in a year.

The biggest bear, on the other hand, insists that Elon Musk’s brainchild isn’t even worth $70 per share. When you average these two figures together, the result is pretty close to where TSLA trades now.

But when the market’s mood drifts toward one extreme or the other, TSLA can shift 5-10% up or down for what amounts to no reason at all. If the S&P 500 moved that far, you can rest assured that there would be a concrete catalyst.

With TSLA and its shareholders, it’s just another day on what amounts to a random walk.

Beta: How Fast Is The Ride?

Volatility is simply inherent in the way that these stocks trade. Back in the hedge fund world, “beta” was the way we measured this tendency to overshoot the market as a whole.

The higher the beta number, the bigger the moves. A stock with a beta of one generally tracks the S&P 500. When the market as a whole moves up or down 1%, so does the stock.

TSLA has a beta of two, which means that you have double the market’s overall volatility. Over time, you’ll expect this stock to move twice as far as the broad benchmark from day to day.

Not every move will be perfectly double the S&P 500, of course. If we could predict individual stocks with that kind of accuracy, investing would be a trivial pursuit, and we would all crowd into the obvious winners.

Sometimes, TSLA lurches down when the broad market inches up. Sometimes, it goes nowhere when other stocks surge. But in the recent past, it’s generally moved twice as far as the market in any given period.

PLTR has only been a public stock since September, so it doesn’t have that kind of data trail behind it. Even measuring its beta is controversial.

Some analysts claim that this stock is more volatile than TSLA. Others are more conservative with their assessments, and one or two analysts have even tried to argue that PLTR tends to trade in the opposite direction of the market as a whole.

(This demonstrates why it’s important to verify data points before you trade on them. Again, there’s a lot of noise out there.)

Here’s the thing: high-beta stocks don’t generate more news than their low-beta counterparts. Not even Elon Musk can make waves on Twitter every day, and yet TSLA keeps swinging in an orbit that would make an S&P 500 index fund investor dizzy.

PLTR is even quieter. Go down the market food chain and you’ll see stocks that haven’t made news in months jump 10% in any given day, then lurch down 10% as the rollercoaster completes its cycle.

Think of Big Cannabis, for example. These stocks don’t even trade on rumors. They’re simply volatile. But when market commentators see those moves, they assume the storyline has shifted in some tangible way to justify the swings.

Trying to concoct a storyline around the swings effectively starts a rumor. It’s all speculation.

And when the market believes the speculation, the storyline goes viral. We’ve seen plenty of that lately, with rumors that the Fed’s rate posture is bad for banks or that current interest rates are starving growth rates for technology stocks.

Neither narrative seems to hold up in the face of the other information that is circulating around Wall Street. The earnings targets that belong to banks haven’t receded. Tech growth trends haven’t flattened.

Likewise, any speed bumps in the post-pandemic recovery are not necessarily a windfall for work-at-home stocks any more than rising vaccination numbers mean that Zoom Video Communications Inc. (NASDAQ:ZM) has outlived its relevance.

The Zoom meeting is here to stay. But here’s the thing: stocks in the S&P 500 with the highest beta scores tend to be the ones that suffered the worst pain in the pandemic. They’re the cruise lines, the casinos and the cinema chains.

They’re the “meme stocks” that run on buzz, rumor and noise. It can be fun to trade the rumor, I’ll be the first to admit. We do it all the time in my High Octane, 2-Digit Trader and Triple-Digit Trader portfolios, where options rise and fall on the faintest twists in investor sentiment.

But when push comes to shove, give me the stocks that quietly rise behind the scenes. That’s the Value Authority experience.