Why Are Wall Street Billionaires Selling Tesla in 2022?

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The Motley Fool

Retail investors like you or I often look to media like CNBC to get our financial information about the stock market. It speaks to you like the "average Joe" has a say in the market's movements, but the reality is that huge multibillion-dollar mutual and hedge funds control most of the stock market, making up an estimated 70% of the trading volume. In other words, it's the "big fish" that rules the ocean.

That's why it could be concerning that some of Wall Street's big players are selling their shares of Tesla (NASDAQ: TSLA) . Why might they sell, and what could it mean? Here is what you need to know.

Image source: Getty Images.

Tesla's institutional ownership is falling

The chart below illustrates the big presence institutions and hedge funds can have in stocks. Big money owned almost nearly all of Tesla's publicly available stock (sometimes referred to as the "float") over the spring of 2021 when the percentage of owned shares hit nearly 96%! These mutual funds and hedge funds must file disclosures with the government, making their holdings available to the public.

TSLA Institutional Investor Ownership Percentage data by YCharts.

The chart also shows how ownership of Tesla has steadily declined to under 69% today. If the overall ownership of stock by institutions is decreasing like this, it's a sign that retail investors are primarily the ones buying these shares on the other side of the transaction. In other words, the mix of Tesla's stock ownership is skewing more and more to retail investors than the Wall Street funds.

Why might this be happening?

It's impossible, of course, to firmly answer this question; different people and funds sell for various reasons. It could be that the firm wanted to sell to reap profits on their investment, or a more appealing opportunity came up.

Tesla's profitability has improved as its production grows and spreads its costs over more vehicle units; the company began generating positive earnings per share (EPS) in 2020. Analysts anticipate this trend continuing, forecasting EPS growth of 38% per year over the next three to five years. This is an ambitious forecast, so investors should keep in mind that Tesla's history of delaying products could undermine this growth. Still, it seems the company is set up with a long runway to grow profits over the coming years.

The share price has climbed dramatically, rising from $600 in May to as high as $1,200 before its recent slide, the stock doesn't appear outrageously overvalued if you're looking forward. The stock's price-to-earnings ratio is 104, and that should come down as EPS grows, even if it takes a bit longer if Tesla's product development stumbles.

TSLA Institutional Investor Ownership Percentage data by YCharts .

It's important to remember that professional money managers often work for wealthy people who expect short-term results . Most hedge funds cannot afford to take a multi-year, long-term approach to invest because they could lose their clients if short-term returns are poor.

That's why I think many of these funds could have sold to book their gains, especially in the face of high inflation, which can be a headwind for growth stocks, and the ongoing supply chain struggles that Tesla and other companies are working through. If you are looking ahead a few years, there is still a lot of good news in the works for Tesla, including its new factories and eventual launch of its Cybertruck .

What is the risk?

But what investors should understand is that institutional buying and selling is powerful and can move a stock up or down. Retail investors can sometimes buoy a stock if the demand is strong enough, as seen with some of these " short squeezes " that took place last year.

If retail investor sentiment turns negative from a bear market , it could damage investor support for the share price, and Tesla's stock could fall further if institutions continue selling.

Remember, this doesn't necessarily have anything to do with Tesla's fundamentals or whether or not Tesla is an excellent long-term investment. It's simply a reminder of the forces at work in the stock market; understanding them can help you make sense of what's happening in the market around you. Investors should always try to focus on the fundamentals of a company they invest in, even when the stock market tries its best to distract you from that.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool owns and recommends Tesla. The Motley Fool has a disclosure policy .

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