A Warning to Tesla Shorts

09/19/2013 6:00 am EST

Focus: STOCKS

Tesla has been both one of the best-performing and heavily shorted stocks this year, notes Chris Drose of SharePlanner.com, and he believes that the shorts are looking at the stock from the wrong angle.

Tesla has become this year's favorite stock. Is it a bubble? Maybe, I personally think the company is awesome, the car is beautiful, and the CEO is a genius, but there is no doubt that the shares have come a long way in a short amount of time. Tesla is still heavily shorted, and there are many arguments on why it will fail. Here are a few things shorts should be aware of.

Tesla Motors (TSLA) has been one of the best performing and most hotly debated stocks this year. It has risen from under $40/share to $166/share, where it currently stands, up nearly 400% this year. This advance has caused many critics to proclaim that Tesla is way overvalued and is due for a crash. Comparisons to Apple (AAPL) at $700 abound, yet shorts have been frustrated by the seeming relentless drive upward. Tesla is a highly volatile stock and one that could drop greatly, but I believe that many shorts are approaching this from the wrong angle.

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The main case from shorts is that the stock is wildly overvalued. Granted, there have been some that have approached it from the fundamental side, suggesting that the company would struggle to maintain margins. By far, however, the short thesis is that "this stock is really, really expensive." Those that are shorting Tesla only for these reasons, should listen to what brilliant short seller John Hempton of Bronte Capital has to say about this very topic. Hempton on valuation shorts:

In a valuation short we are working on the same information as everyone else has. This makes me uncomfortable. There is an arrogance in suggesting we can analyze the information better than anyone else. We find it harder to answer the question of what we see when others don't and hence harder to justify the position at all. (...) Anyway-I am uncomfortable because I can't describe my informational edge and I don't like thinking I am smarter than other people (as opposed to better informed than other people).

This is critical to understand for Tesla shorts. Unless you are doing something that I am not aware of, in this case you do not have better information than the market. While I don't believe that the market is totally efficient (far from it), Tesla shorts should be aware of (and most likely are) that the market can remain irrational far longer than they can remain solvent in the words of Keynes.

Granted, Hempton later said on Twitter that he would rather be short than long this particular stock, but it is still a very valid point about valuation shorts. @LongShortTrader had an excellent post several weeks ago on his blog about short sellers. It was in a post about allocating to short-selling hedge funds, he suggested that if the PM talked about AMZN as a short, then he wasn't a true short seller. I don't think those that are short Tesla are true short sellers, more than anything right now they are hurting big time.

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Tesla is the third best selling car in the luxury and sports segment in California this year, selling 4714 Tesla Model S cars. Still this is only California, for a better overview, we need to see broader trends. For the sake of this argument, I will only include more direct competitors (Audi, BMW, and Mercedes).

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All this isn't perfect, but I think it gives one a pretty good picture that Tesla is selling a very, very popular car to rich people on the West Coast.

By Chris Drose, Contributor, SharePlanner.com

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