Why I’m shorting this much-loved stock

Dominic Frisby

Today we consider Tesla Motors (Nasdaq: TSLA), one of the current darlings of the American stockmarket.

The company may represent the future of the car.

Its CEO, Elon Musk, is a genius.

Its investors are deeply passionate about the company.

Time to sell?

Shorting is a risky business – but it can be profitable

I was at my old buddy Tom Winnifrith’s UK Investor Show at the weekend. The final item on the agenda was the bears’ panel. It featured, among others, the UK’s most notorious short seller, Simon Cawkwell, aka Evil Knievil, who I remember first meeting back in 2008, shortly after he’d made a million quid shorting Northern Rock.

Shorting, by the way, is the dangerous art of speculating that a share price will fall. If Evil is shorting your stock, beware. It usually means he has identified a dangerous flaw in your business, usually in your balance sheet.

Tom asked Evil what his current favourite short is. “Tesla”, said Evil, without having to think too hard.

“Are you mad?” I thought.

Just last week, I’d been reading up on Elon Musk. My goodness me, what a man. “Evil”, I thought, “unusually intelligent though you may be, are you seriously betting against a guy who had read his local library dry, including the entire Encyclopaedia Britannica, by the time he was eight; who, at the age of 11, finished a six-month coding course in three days; and who was behind several multi-billion dollar companies, including PayPal, SpaceX and Tesla? You’re picking one of the greatest talents in the world as your opposition.”

“It’s one of the most obvious shorts I’ve ever seen”, said Evil casually.

It was when he started pointing out the fervour of Tesla’s stockholders that something clicked for me. Tesla’s stock owners believe passionately in Musk. That belief may well be well placed. The man – and his company – clearly have enormous potential, rare potential, once-in-a-generation type potential.

But the point is that this is a belief in potential, not “actual”.

And it’s a belief that has carried the stock to enormous multiples. A market capitalisation of $33bn for a company that is loss-making might – just might – be acceptable for a company that has total control of its market.

But who’s to say that BMW or Mercedes or Toyota can’t come along and make cars that are even better? I’m not saying that they will, but that it’s by no means impossible.

It’s a similar kind of belief that Apple owners once had (and in some cases still do, even although the company’s products are not as exceptional, relative to the opposition, as they once were).

It’s a similar kind of belief to the one the gold-owner once had (one of which yours truly is very guilty), declaring that gold will go to $15,000 an ounce, and form the bedrock of the world’s next monetary system.

(Actually, that could happen, but let’s not go there).

The point is, this isn’t something that has happened that the market is missing – it’s something that hasn’t happened.

Value is set to trump growth

If, as my other buddy, Charlie Morris, argues, we are shifting in the investing cycle to a period when value beats growth (growth has outshone value over the past few years) then momentum plays such as Tesla will lose out. If we get a downturn, the momentum plays will outperform on the downside.

When markets corrected in January and February, Tesla fell from $240 to $140 in barely five weeks. It has since rallied back to $270, but the falls show how quickly that belief can be punctured when the markets turn against you. Such is the way with sentiment-driven momentum plays, which is, for all the great things this company may well go on to do, how I categorise it at these prices.

The all-time high for the stock is $290 in the second half of 2014. The 2015 highs were a little bit lower – $286 and then $271 – and the 2016 high was $269 last week. Each high a little bit lower than the last – you know what that means.

Looking at the more recent action, we can see that a slight downtrend has developed over the past week or so. The momentum of the huge move from February appears to have run out of steam, right near the top of the trading range of the past few years. It’s now trading below its 9- and 21-day moving averages, which have turned. And we have a MACD (“moving average convergence divergence”, a measure of momentum used by technical traders) sell signal.

A lot depends on the action of the broader markets, but I reckon it’s time to short Tesla, folks, and that’s just what I shall be doing.

$190 and even $140 both look possible.

If it goes above $270, I’ve got it wrong and I’m out of the trade.

I was particularly impressed with a recent talk I heard by Ed Croft of Stockopedia, in which he observed how – such are the tricks the mind plays – investment decisions don’t always improve the more you know about something. Five reasons are often as good as 15. So here are my five simple reasons to short Tesla:

1. It’s a momentum play that has reached the top of its range and run out of steam.
2. Now is a time to be in value not growth.
3. The near-religious fervour amongst Tesla owners has created a mini-bubble that could pop.
4. I’ve got a technical sell signal.
5. Evil’s shorting it.

 

Category: Investing in Technology

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