Tesla Motors (NASDAQ:TSLA) shares have rallied 41 percent year to date, and I suspect the stock has much further to run before being "overbought." If in 2013, Tesla can report the $418 million in profit that I arrived at in my article Tesla Model S Owners Could Realize Amazing Savings, my optimistic price target of $144 could possibly happen in the near mid term. If investors are willing to "price in" the future, Tesla's stock could continue its current bullish trend, and potentially reach this target sooner than anyone is expecting.
Retail is buying, and very few are selling.
Friday, Tesla rallied to within two cents of $50, an event that I correctly predicted would happen in my article Tesla Model S is Ready for Prime Time. The stock rallied throughout the day, but had trouble breaking through $50. I suspect this was due to "stop limit orders" that were placed by retail investors. I suspect Tesla is rallying due to "new buyers coming in" in anticipation of the "big news" that Elon Musk has promised is coming. Although Tesla's stock has rallied 35 percent over the past few weeks, daily volume has been about the average of 2 million shares, with the exception of April 1, when volume spiked to 14 million shares following the announcement that Tesla has achieved profitability, was raising guidance, and that something big was going to happen, and I have seen no indication of a full-fledged "short squeeze," where short sellers attempt to cover most if not all of the 31 million shares currently sold short.
Could a Short Squeeze Happen?
Even though "bullish sentiment" has caused Tesla to experience a tremendous rally, short sellers have not covered, and short interest remains around 40 percent of the float. If the short sellers run to cover due to unexpected "positive news," Tesla could end up a repeat of the Volkswagen "short squeeze" that resulted in Volkswagen's stock increasing by 500 percent in one day.
The facts surrounding the Volkswagen short squeeze were as follows:
For about three years, Porsche had been steadily increasing its stake in VW, a much larger yet less profitable carmaker with which it shares a little production. Its buying had driven up the price of VW's shares to above the level at which it would make any economic sense for Porsche to buy VW. Seeing this, hedge funds sold shares in VW that they did not own. One strategy was a bet that VW's share price would fall. Some also bought shares in Porsche, in a wager that shares of both would converge.
Adam Jonas, [The same analyst who is covering Tesla] of Morgan Stanley, warned clients on October 8th, 2008 of the danger of playing "billionaire's poker" by betting against Porsche. Max Warburton of Alliance Bernstein said Porsche could make billions by squeezing short-sellers of VW's shares.
At the time Porsche dismissed these musings as a "fairy-tale." But on October 26th it executed a handbrake turn, saying that it owned nearly 43% of VW's shares outright and had derivative contracts on nearly 32% more. That meant it had tied up almost all of the freely available shares (the rest are held by the state government and index funds). Hedge funds quickly did the math, concluding that they could be caught in an "infinite squeeze" in which they were forced to buy shares at any price." (Economist)
I wonder if Jonas plans to issue a similar note to clients regarding Tesla, and if perhaps Daimler (OTCPK:DDAIF), a major partner of Tesla has repeated the steps taken by Porsche, by acquiring a large percent of the available common stock. Daimler, like Porsche, is located in Germany, a country where businesses, under certain circumstances, are not required to disclose owning a "large stake" in another company. This "loop hole" is what made it possible for Porsche to acquire a "very large" stake in Volkswagen without hedge funds knowing about it.
In theory, even if short sellers are hedged, as I mentioned in my article, Tesla Motors: A Perfect Hedge, I believe they are, the effects of a short squeeze could happen, where the stock experiences an abnormal, and unsustainable instantaneous rise. Although I initially posited that a short squeeze was unlikely, due to the shorts being hedged, I am no longer certain this is the case. Shorts being hedged would prevent "fear based covering," but the effects of a short squeeze, where a stock experiences an abnormal instantaneous increase due to high demand and low supply could still manifest. If the effects of a "short squeeze" happened, it would not be a result of shorts being forced to cover, but rather, a byproduct of profit taking and a massive synchronized unwinding of very large hedged positions. If Daimler, a very large cash rich company, has acquired as many shares as it can buy of Tesla, a much smaller and less profitable carmaker with which it shares a little production, the effects of a "short squeeze" could happen the moment Daimler announces that it owns a large percentage of Tesla's common stock.
Anyone un-hedged, who is shorting Tesla today is playing a game of poker that they have little chance of winning. If Daimler, or any entity for that matter, announces that it owns 30-40 percentage of Tesla's common stock, a short squeeze could be imminent, and the stock, assuming it follows the same pattern as the Volkswagen short squeeze and jumps 500 percent in one day, could reach $150-200 sooner than anyone is expecting. Anyone short Tesla, who is un-hedged, should strongly reconsider their position.