Tesla: The Short Squeeze, Rather Than Short, Of The Decade?

| About: Tesla Motors (TSLA)

Summary

Tesla shorts are gluttons for punishment despite what I agree is a stock that is fundamentally overvalued.

Short squeezes rarely happen because a stock is overvalued but rather they tend to ironically be more common exactly when a hot stock in a hot market is overvalued.

The voting machine, rather than the weighing machine, rules Tesla’s stock price and there is plenty of reasons that more positive “votes” will continue to pour in rather than negative.

I recently ran across a Tesla (NASDAQ:TSLA) article entitled, Tesla: The Short Of The Decade? which was published on Tuesday morning, August 19, coincidently at around $252 per share. It was virtually the exact low almost to the second of the last 10 trading days. I don't mean any disrespect or mockery, especially since the author almost certainly wrote the article the day before publication when the stock was at a much higher price. It does illustrate though, by accident, the danger of shorting a Wall Street darling regardless of the underlying fundamentals.

You've heard the old saying "Never step in front of a moving train" regarding shorting I'm sure. Maybe the saying needs to be modernized to "Never step in front of a moving electric SUV." I currently hold no position in Tesla. I've traded it before in and out on the long side. I agree with the author and thousands of articles and blogs before his, and likely thousands of articles and blogs after his, that Tesla is fundamentally extremely overvalued at least at this time and possibly under just about any scenario except the most extremely optimistic of scenarios (where, for example, Tesla expands into other areas through acquisitions or organically or oil prices go to $300 or something else crazy.)

Here's why, in response to the article, I think it's crazy and dangerous to short Tesla at this time.

Overvalued? Bah-humbug

First and foremost, Tesla IS indeed overvalued based on historical results and based on even the most optimistic of analyst estimates for next year. The problem is simple: Everybody already knows that. Nobody is investing in Tesla based on the current results. Tesla might as well have zero cars sold practically. Everybody, right or wrong, who is long is betting on the future and has in his or own head a speculative vision of the future, many years from now, and is buying up the stock based on that.

It's that type of dreaming driving the stock price - not fundamental analysis - that means Tesla could see continued strong buying volume. Dreamers are not going to wake up one day and decide Tesla is overvalued. They're not buying for value. We're in a hyper bull market where people buy stocks of companies they like instead of stocks of valuations they like, and the company that is Tesla continues to execute well and be quite likeable. As Warren Buffett says, "Only when the tide goes out do you discover who has been swimming naked." In other words we may need a bear market before Tesla shows its "real stuff" or starts to trade at least somewhat based on actual fundamental data.

The crowd may be delusion but that's not good for shorting Tesla

The author says in his bullet points, "Bullish investors mindlessly push Tesla's stock from one high to the next" and "Tesla is a crowded trade and predominantly loved by retail investors." I couldn't agree more. The problem with this scenario for us valuation lovers (for which there are plenty of who write for Seeking Alpha) is this type of mind set is the perfect recipe for more short squeezes. Short squeezes by their very definition don't occur due to positive fundamental change but rather due to an almost artificial rise in a stock price from covering by shorts who throw in the towel either by force from their broker or by self-initiated decision.

Second quarter still shows unknown demand

The author points out that the second quarter wasn't that all the fantastic. I believe he was right. However, since Tesla continues to be product constrained instead of demand constrained it leaves the demand picture unknown and subject to the whims of imagination. Betting against imagination can be a dangerous thing, often more dangerous than betting against real, measurable fundamental numbers. Nobody, not even CEO Elon Musk, has a clue what the real demand has been if Tesla's vehicles were readily available for same-day purchase. Car salesmen will tell you that their taught not to let a potential buyer leave the parking lot because if you don't close him right there and then the odds of him coming back and buying are much lower. Vehicle demand for a large extent is impulse-now driven. If there was some hard numerical way to measure it, then all of us geeks with calculators could make a more convincing case to help longs book their profits. But we have nothing. Imaginations are free to run rampant.

What a story

I think everybody can agree at this stage Tesla is a story stock. The story is fantastic so longs continue to be excited and push Tesla to new highs. The late, legendary Benjamin Graham once said, "In the short run the market is like a voting machine, but in the long run the market is like a weighing machine." Shorts continue to try to step in front figuring a story can only last so long and the voting machine will eventually lose to the weighing machine. When does the weighing machine come into place? It's probably years away or at least, using the most pessimistic of forecasts, not until late next year before there is a realistic chance of Tesla producing even one car more than it can sell. So, again, the story and imagination are free to run wild.

Negative catalysts: where are you?

What catalysts are there to help on the short side? Unless something comes out of left field, which is always possible, generally a hot story stock in a hot stock market needs some sort of negative disappointing news until the weighing machine shows its ugly face. A true "short of the decade" I think would be a biotech with only one drug in the pipeline about to go up against an FDA vote and a skillful experienced researcher has made a case that the drug will get voted down and thus basically the FDA will end the life of the company in the stroke of a pen. Where's Tesla's FDA-like catalyst?

I again agree that Tesla is overvalued, but who or what exactly is going to pull the cord of the jukebox on this Tesla party any time soon?

Positive catalysts: here you are

There are numerous positive catalysts people are expecting and longs tend to each have their favorites they attach to. An attached long won't be easily pried away until he or she gets their catalytic event. There is the launch of the Tesla SUV for example. There is the production ramping next year to 2,000 vehicles a week. There are new rich customers buying cars every day then buying the stock along with all of their friends. There are new showrooms, new charging stations, and new surprise deal announcements coming at a steady pace. Then there is the dangling carrot of the Gigafactory. This isn't a failing company with upset pessimistic investors. They have a lot to look forward to, valuation be damned.

If only we had a reason to hate Elon Musk

The author also points out that Elon Musk is a charismatic CEO. Again, this is a serious problem. The cult-leader-like CEO has his devoted following who don't change their minds easily. This leads to another problem for shorting. I once read that IBM is the most widely owned stock among institutions and funds. The reason wasn't due to the belief that it was most thought of as undervalued. The reason was simply window dressing. It is a popular stock led by a popular management that fund managers don't have to explain why they own it. Those examining the fund and see "IBM" tend to immediately approve. By owning IBM and other popular widely-known names, funds are freer to get away with throwing money at some more risky names without being as heavily scrutinized for it.

On that note, Tesla may be experiencing a bit of the same. It began the year at $150 and it is up significantly from there. Owning Tesla is popular and makes a fund look good this year. Those looking from the outside less so examine the entry price so the reaction is "Oh, you own Tesla? Wow, you must have done well on that." Big popular stocks of a popular company with a popular, charismatic CEO and a stock price ripping to all-time highs tends to beget more institutions and funds trying to ride the coattails

To sum it all up: shorts are gluttons for punishment. I won't buy and hold Tesla at these levels due to what I agree is an unjustifiable high fundamental value, but I still wouldn't short it for all the reasons listed.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.