It Won’t Be Short Sellers Who Kill the Tesla Share Price

Take that…and that!

Turning to see what the commotion was, we watched with bemusement as another trader threatened his screen.

At first, it wasn’t clear what all the fuss was about. However, we soon realised why the trader was so agitated. He was shorting a stock, and it wasn’t cooperating. Irrespective of how many times he sold the bid price, another buyer would soon emerge.

Clenched fists, and gnashing of teeth. As the share price kept rallying, the trader’s frustration continued to grow. After holding onto the position for weeks, he eventually abandoned the position as the losses started to mount.

Despite the loss, the trader was sure his analysis was right. He’d run through the numbers in minute detail. He’d studied its competitors and believed the whole sector was a mess. But as he railed about the company’s poor fundamentals, the share price continued upwards on its merry way.

Shorting stock — where you sell shares you don’t own (by borrowing them from a third party) with the aim of buying them back at a lower price — is a common trading technique by professional fund managers. However, it’s a lot harder than it looks.

It’s more than fundamentals

If shorting stock was only about a company’s financial position, there would be a lot of potential candidates. You’d constantly be on the lookout for stocks that are overleveraged. Whose profits and margins are shrinking? Whose management is on the slide?

But even if you find such companies, what’s to say the share price will follow the fundamentals down? There are stocks that soar for years before reality brings them crashing to Earth.

There is no stock that shows the challenges of shorting more than the granddaddy of them all — Tesla. No share has attracted more short sellers than Tesla.

To my knowledge, Tesla has never made a profit. It loses money every quarter. It is beset by production issues, and continues to unveil new models that might never make it into production.

Yet despite all the dire predictions — and the poor fundamentals — Tesla has become the widow-maker of short sellers.

From December last year through to June, the Tesla share price more than doubled. In April, Reuters reported that Tesla short sellers had lost a combined total of US$3.7 billion — and that was only from the start of the year!

Tesla was unprofitable back in 2013 when its share price was bumbling along at $30. It’s still unprofitable in 2017, yet the share price recently traded as high as $386. Over all this time, short sellers have believed their analysis to be right.

You can see the price action in the Tesla price chart below. Each time the short sellers won control, the price rallied and squeezed them out.

Tesla share price — weekly

Tesla's Share Price July 2017


Source: eSignal
[Click to enlarge]

The same report from Reuters showed that at the start of April (the red circle), these short positions had grown to over $10 billion. At the time, Tesla was trading at $260.

Within two months, the share price looked to be on the way to $400. Even with all this weight of money overhanging in, the share price buried those who bet against Tesla.

However, over the last week, once again the Tesla share price has turned and is falling heavily. And perhaps this time, the short sellers will be right.

But is this share price action happening due to the weight of more short positions being added? Maybe it’s much simpler than that.

When sentiment comes into play

This week, Volvo announced that all its cars will be electric- or hybrid-powered by 2019. Of course, ‘hybrid’ is a nice-sounding word that involves both the use of an internal combustion engine and an electric motor.

That aside, the point is that, within two years, Volvo will no longer produce a car that is powered solely by an internal combustion engine. And between 2019 and 2021, it plans to add another five models — all of them purely electrically powered.

And Mercedes-Benz is quickly playing catch up, too. Having been caught out by the popularity of Tesla, it announced last year the fast tracking of an electric car, adding it to the hybrid models already on offer.

Tesla has had a huge head start with electric-powered cars. And for being the first to attempt mass production, it has attracted a lot of kudos and goodwill.

However, despite Tesla’s ‘cool’ factor, there are only two major differences between its cars and others. Its powertrain, and a funky screen. Something every other manufacturer is busily working to match, and then overtake.

It won’t be a trader sitting in front of a screen who will ultimately determine Tesla’s share price. Instead, it will be how Tesla responds to the onslaught once all the major manufacturers are competing on its turf.

Tesla’s share price has traded on sentiment about the infinite potential of its technology. But so far it’s been a one-horse race. Once all other manufacturers are competing, we’ll find out if Tesla can retain its position…and its share price. Or, if it will survive at all.

Regards,

Matt Hibbard,
For Markets & Money


While many investors chase quick fire gains, Matt takes a different view. He is focused on two very clear goals. First: How to generate reliable and consistent income in a low-interest rate world. And second, how you can invest today to build wealth over the next 10–15 years. Matt researches income investments. You can find more of Matt’s work over at Total Income, where he is hunting down the next generation of dividend-paying companies for the future. He is also the editor of Options Trader, where he uses basic options strategies to generate additional streams of income beyond the regular dividend payments. Having worked for himself and with global firms for almost three decades, Matt has traded nearly every asset in existence. But now he is on a very different mission — to help investors generate income irrespective of what the market is doing. It’s about getting companies to pay you a steady, stable income, with minimal stress and the least risk possible. Matt doesn’t believe you have the luxury of being a bull or a bear in the market right now. You have to earn an income from it, regardless of whether stocks are going up or down. By getting the financial markets to pay you an income, you can get to focus on more important things than just money.


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