If you have followed the stock market this year then you are probably aware of what is going on with Tesla. In the last six months the stock has returned nearly +300% and is up +400% from its lows last June. This is a MASSIVE move for a company this size. One reason (not the only) is technical. We could be witnessing the largest short-covering rally of all time. Let us explain. There are a lot of investors betting against Tesla. When someone bets against a company, they borrow shares from a broker and sell them in the open market with hopes of buying them back later at a lower price to make a profit. If the stock goes up and you are short, you lose money. To close out a short trade you have to buy the shares back. When there is a truckload of shares being borrowed and sold short in the market, odds are that a big move up will trigger a lot of people buying back the stock to close out their trades. Hence, a short-covering rally! Last May about 25% of the shares of Tesla were sold short. Today that has been cut in half. Translation: a lot of buying.
Today Tesla’s market value is over $160 billion. The big three (GM/Ford/Chrysler) have a combined value less than $110 billion. Tesla’s sales over the past year are $25 billion. The big three’s sales are $425 billion. On the surface this makes little sense, but investors are obviously betting on the growth of electronic cars. Tesla is the clear leader and while naysayers continue to point to the competition coming, it has yet to materialize.
One takeaway is that it’s easy to look back today and say you should have owned the stock. But recognize that there were many legitimate outcomes that could have ended very poorly. The CEO had a very public battle with the SEC and the company itself has been close to insolvent on many occasions. You wouldn’t have the current result if there weren’t a ton of risk built into the stock. And if we had to guess, the wild swings (both up and down) are not over. Tesla doesn’t fit the profile of a core holding for us today, but it is certainly a company and industry that we are following.