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Amid the Turmoil, Tesla Stands Out - and Short Sellers are Feeling the Heat

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Even through the wild price swings we’ve seen lately – including a 700 point single-day swing in the Dow on Thursday – shares of electric automaker Tesla (TSLA - Free Report) have weathered the storm and are once again approaching all-time highs.

Since the breakthrough Q3 earnings report that showed the company delivering 83,500 vehicles including 55,840 Model 3s, generating positive cash flow and net earnings of $2.90/share, the shares have climbed steadily upward even as recent tech superstars like Apple (AAPL) and Alphabet (GOOG) have been pummeled.

Tesla CEO Elon Musk famously tweeted earlier this year that he was predicting the “short burn of the century” and it’s certainly starting to look like he was right. The losses piling up for Tesla bears are staggering.

Tesla remains one of the most heavily shorted stocks with nearly 25% of shares sold, but it’s been an enormously painful ride for the bears as the stock is up more than 35% since closing at $265/share on September 28th, the final trading day of the 3rd quarter. The S&P 500 has lost 8% over the same period.

Short sellers can usually count on positive returns during broad market declines as most stocks are pulled lower even when there has been no meaningful change in fundamentals in their targeted names, but they’ve seen no such relief in Tesla which has continued to shrug off the big drops and often posted gains on days when most other stocks were sharply lower. At midday Friday, with the major averages all down more than 1%, Tesla shares were up 3% after another positive analyst upgrade.

One of the short’s most powerful arguments – that Tesla was burdened by debt and would need to raise cash soon - has disintegrated during the latest run. Tesla has a convertible debt issue coming due in March of 2019, but with the stock trading above the exercise price of $359.88, bondholders can be repaid in shares. Bloomberg reported earlier in the week that Tesla planned to retire the debt issue with approximately 50% each cash and stock, which the markets took as an indication that the company was confident that it would continue to generate positive cash flow going forward.

Tesla’s debt-heavy balance sheet is not likely to be a concern going forward.

In addition to the fact that Tesla now seems able to consistently produce 7,000 Model 3s per week and is widely expected to exceed Q3 results in the current quarter, It has also been the beneficiary of the recent détente in the US-China trade negotiations with China agreeing to relax tariffs on imported automobiles which had recently been as high as 40%, hurting Tesla sales in the world’s largest market for electric vehicles.

Thanks to 7 positive earnings estimate revisions in the past 60 days, Tesla is a Zacks Rank #1 (Strong Buy).

Having already surpassed the market caps of US automakers Ford (F - Free Report) and General Motors (GM - Free Report) as well as Italian-based Fiat Chrysler (FCAU - Free Report) , Tesla’s latest gains vaulted it above German manufacturer Daimler. When short sellers target weak companies, their negative predictions can sometimes become a self-fulfilling prophecy as pressure on the share price has negative implications for the company’s financial operations. In the cases in which they’re wrong, the shorts can actually provide a powerful tailwind as they are forced to cover their positions in rising markets.

Two of the most prominent short sellers of Tesla shares – David Einhorn of Greenlight Capital And Jim Chanos of Kynikos Associates – made their names and much of their fortunes in big short positions. Chanos was among the first to recognize the problems at Enron and Einhorn did the same with Lehman Brothers. Psychologically, recognizing trouble early and being the first to take a big contrarian position that ultimately succeeds is an intoxicating and addictive sensation.

Unfortunately, like other addictions, it often leads the afflicted into less rational decisions in pursuit of the next score.

If Tesla keeps executing at current levels, the shorts are really going to feel the fire licking at their heels and the race to the door won’t be pretty.

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