Tesla Is Not A Fundamental Investment

| About: Tesla Motors (TSLA)

Because of the recent price action, Tesla (NASDAQ:TSLA) has garnered some truly fanatical fan boys and haters. I've seen extremely detailed analyses on what the current price implies, how the stock will hit $200, how it's the best short since sliced bread....the number of views are endless.

The big problem is that I seem to be the only one who considers Tesla, nothing but a function of a short squeeze.

Prior to its May earnings, short interest stood at 45% (or 31.5m shares) and shares were changing hands at the speed of 1 - 3m per day. Assuming a 30% participation rate (this is the rough participation rate that doesn't impact price), the shorts would need three months to liquidate their holdings!

As with most real investors, these guys will have a risk department that closely monitors all trades meaning that any significant losses will lead to either grace periods or forced liquidation.

Chart forTesla Motors, Inc. (<a href=

Because the stock has not dropped since the IPO, prior to the earnings report, there would not have been one short player in profit. This is a warning sign.


Because the stock has not dropped since the IPO, prior to the earnings report, there would not have been one short player in profit. This is a warning sign.

Let's compare this situation with another company that had a similar short interest, Ocado, OCDO.

Chart forOcado Group PLC (OCDO.L)

Because the stock dropped from highs of 200-250p to 50p, there would have been a lot of profitable shorters sitting in this stock at the beginning of this year.

In the past five months, the stock has gone up 300%, which is a lot more extreme than Tesla's price action, but throughout this rally, many shorters were giving back profits rather than taking more losses.

Going back to Tesla, remember that prior to the strong numbers, 100% of shorters were already losing money. The stock gains 25% in the course of a day meaning that the shorters who didn't close their positions on results day were faced with 25% losses.

Consider that a lot of fund managers and risk teams consider 5 - 7% losses on a position to be a cause for concern. Also consider that there simply isn't enough sellers on any given day to let these out.

The Clues To a Short Squeeze

1. Volumes exhibit a prolonged increase

On the May 9, volumes in TSLA jumped from the 4-7m mark to the 28m mark. On the face of it, this isn't far from normal considering that trading is always concentrated around information.

Take Apple (NASDAQ:AAPL) and better yet, take a more extreme case (January 24, 2013) where volumes jumped from an average of 17 - 20m shares to 52m shares. In the case, volumes returned to a normal rate three days later.

Tesla volumes haven't shown any signs of returning to a normal rate and considering we are in day 13 of this rally, something is profoundly different. Consider also that the spike in volume was around 10x average daily volume, compared with Apple's 2x.

2. The price runs away from the fundamentals.

There have been a number of quality articles trying to work out what the Tesla share price implies if $110 is the true worth of the business. All of these articles have failed as the price no longer corresponds to fundamentals. Look at the bank analyst price targets: Barclays is the biggest bull with a $90 price target while the rest of the Tesla bulls sit at the $70 Price Target.

If the price has run ahead of the most informed bulls, there is a problem.

3. Short interest changes.

Short interest has declined from 45% of the float to 34% of the float. This implies only 7m shorted shares have been closed out, which doesn't make sense considering more than 150m shares have traded since the results. This is because short interest given to the public is delayed by 3 - 7 days.

A more reliable indicator would be a stock loan desk and having called around this morning, I can tell you that the price to borrow for Tesla stock was last given at around 11-15% (ie you have to pay $13 - $19 per annum to short the stock).

What's even more amazing is that there is currently very low borrowing liquidity suggesting that there are significant number of shorts currently in the market.

4. The stock hasn't rebounded

This follows on from my earlier point as in the case of Tesla you can be sure that 100% of shorters are currently loss making and in danger of having their positions cut by either their own standards, the risk department, or the exchange.

Tesla exhibits all indicators of a short squeeze and because of this, any kind of fundamental analysis to justify or refute the current price is completely redundant. If you are a long player and you love the business, sell out. You have won the lottery and whether you close positions at 110 or 150, you have made a lot more money than you ever thought possible in such a short time.

I can state quite confidently that we will see sub $100 prices in the next two months (in my opinion, 70 - 80) and once the investor base has normalized and borrow costs return to a more healthy 2 - 4%, you will be able to invest at a much more reasonable price, with a ton of lottery money managing your downside.

Happy investing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.