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Stocks  | June 15, 2020

Two bulge-bracket Wall Street brokers—Morgan Stanley and Goldman Sachs—cut their ratings on Tesla shares, adding fuel to the debate about what the stock is worth. Goldman Sachs, for its part, has another idea for investors looking for automotive exposure: General Motors.

Morgan Stanley appears to be the more bearish of the two about Tesla. Analyst Adam Jonas cut his rating from the equivalent of Hold to Sell and took his target price from $680 to $650 a share.

According to reports, he believes the recent run up in Tesla shares—which have advanced about 20% over the past month—fails to discount some growing risks. In particular, Jonas is worried about the deterioration of the U.S.-China relationship caused by U.S. accusations and recriminations over Beijing’s handling of the coronavirus crisis.

China is the world’s largest market for electric vehicles and Tesla recently opened a manufacturing facility in Shanghai. The country has a larger impact on Tesla as a market than on most other U.S.-based auto makers.

Goldman analyst Mark Delaney isn’t as concerned. He downgraded shares from the equivalent of Buy to Hold, but raised his target for the stock price from $925 to $950. He is still positive on the long-term outlook, but is suggesting that investors take profits. Since Goldman put Tesla on its “America’s Buy List” on April 14, the shares are up about 37%. The S&P 500 is up about 5% over the same span.

Delaney likes General Motors (GM) stock better now. He upgraded shares to Buy from Hold and increased his price target to $36 from $25. GM closed at $26.50 Thursday.

“GM is well positioned to benefit from the Rule of 3 framework,” wrote the analyst in a Thursday evening research report, citing “1) Trough margins; 2) Management capitulation; [and] 3) Signs of life on the horizon” as the elements needed for auto makers to outperform.

GM profits are falling and management is focused on reducing costs, a sign it recognizes how grim things have become. That satisfies his first two criteria. With auto sales rising in both the U.S. and China from earlier, terrible Covid-induced levels. Delaney’s third criterion is met.

The ratings changes are having a bigger impact on GM’s stock than on Tesla’s. That’s a little surprising. Tesla stock is a highflier, up about 130% year to date, crushing comparable returns of its automotive peers. so it might look more vulnerable to analyst downgrades than other stocks.

What’s more, Goldman and Morgan Stanley are two of the largest, most prestigious brokerage firms. Ratings changes among the largest brokers tend to carry a little more weight.

That’s all true in theory, yet Tesla stock was down only marginally, at $966, in early trading, as the entire market bounces back after Thursday’s hammering. The S&P 500 was up 2.2%.

Tesla is also a little more immune to ratings changes than other stocks because analysts are already very polarized. Only about one-quarter of analysts covering the stock rate shares the equivalent of Buy and the average analyst price target is less than $700, well below recent levels.

The average analyst price target for GM stock is about $33, above recent trading levels. There is less controversy about GM stock as far as Wall Street is concerned. GM shares were up almost 6% at $28.03 in early trading.

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