Shorts Get Rare Payout on Tesla in Worst Year for BearsNikolaj Gammeltoft and Lu Wang
In one of the toughest years ever for short sellers, betting against Tesla Motors Inc. is starting to pay off.
Tesla, the best-performing stock in the Nasdaq 100 Index for 2013, has lost 29 percent since Sept. 30. About $6.59 billion was wiped from its market value, the biggest decline this year among the 10 most-shorted American companies, data compiled by Bloomberg show. Options traders are increasing the cost of betting on declines amid speculation the shares will keep paring a 307 percent rally.
The U.S. market’s broadest advance on record has burned bears as increased confidence in the economy spurred demand for smaller, faster-growing companies such as Tesla, which had a decade of losses before 2013. Stocks that investors shorted the most soared, partly because of forced buying during rallies by speculators who borrowed shares and sold them.
“You’ve just had an incredibly strong market this year and, in that type of environment, it’s hard to find stocks that are going to go down whether their fundamentals deserve it or not,” Gary Flam, a portfolio manager at Bel Air Investment Advisors LLC in Los Angeles, said yesterday by phone. His firm oversees about $7 billion. “Tesla has gone straight up and the valuation stopped making sense a long time ago.”
Tesla shares tumbled 21 percent on Nov. 6 and 7, the biggest two-day retreat since 2010, as vehicle sales missed some estimates. Last week, a Model S sedan in Tennessee became the third accident in about five weeks to result in a blaze.
The stock is a “good deal” after the drop, Elon Musk, the company’s co-founder, said yesterday at the New York Times’ DealBook conference in New York, which was webcast and telecast on CNBC. Liz Jarvis-Shean, a spokeswoman for the Palo Alto, California-based company, declined to comment on the short sales and the options trading.
Chief Executive Officer Musk said “there’s definitely not going to be a recall” of the Model S as the electric-car maker waits to see if U.S. regulators investigate crash-related fires involving the sedan.
“We’re about five times less likely to have a fire than an average gasoline car,” Musk said yesterday at the conference. Reaction to the fires reported by some media was “extremely inaccurate and unreasonable,” he said.
Implied volatility, used to gauge the cost of options, for one-month contracts with an exercise price 10 percent below the stock was 59.3 yesterday, data compiled by Bloomberg show. That compares with 53.9 for calls protecting against a 10 percent gain. The price relationship known as skew was 6.3 on Nov. 11, the highest level since January.
The stock declines are a rare success for bears in one of the worst years for short sellers. More than 440 stocks in the Standard & Poor’s 500 Index are up in 2013, the most since at least 1990, data compiled by Bloomberg show.
The HFRI EH Short Bias Index, a measure of returns from hedge funds that primarily bet on declines, slumped 16 percent in the first 10 months of the year. A measure of U.S. stocks that are the most shorted has jumped 38 percent since January, according to data from Goldman Sachs Group Inc.
Tesla’s market value has shrunk to $16.9 billion from a record $23.5 billion in September, according to data compiled by Bloomberg. Salesforce.com Inc., among the most-shorted stocks in the S&P 500, had a similar drop after losing $6.1 billion between May and June this year.
The move in Tesla is reminiscent of technology shares that soared in early 2000 before the bubble burst, according to John Thompson, who is short the stock at Vilas Capital Management LLC. Tesla trades at 115 times projected earnings for the next 12 months, the highest in the Nasdaq 100, data compiled by Bloomberg show.
“It takes a while until inflated, but when they pop, it goes quick,” Thompson, chief investment officer at the Chicago-based hedge fund, said yesterday in a phone interview. “I don’t think the company can expand to the mass market like it’s implied in its valuation. As the world figures that out, there is going to be substantial downside to the stock.”
Tesla is the third-most shorted company in the Nasdaq 100 with 21 percent of tradable shares borrowed, according to data compiled by Bloomberg and Markit, a London-based research firm. While the proportion of bearish wagers has increased this month as the stock tumbled, it’s down from 44 percent in March.
The valuation is in line with technology companies that are expanding rapidly, Elaine Kwei, an equity analyst at Jefferies Group LLC, wrote in a Nov. 6 research report. She said the price-earnings ratio is between 26 and 32 based on estimates of the company’s future profitability. Semiconductor company Cree Inc. has a forward multiple of 31, according to the note.
“We’re only scratching the surface of things to come,” Kwei wrote. “If we step back from the near-term focus on third quarter results and look at the past year in context, it becomes clear that TSLA has achieved tremendous milestones from a design, marketing, technology, and manufacturing standpoint.”
The luxury auto company, started by PayPal Inc. and Google Inc. founders, introduced its first modern battery-electric sports car in July 2006. The company plans to deliver 21,500 units of its Model S this year, up from a previous goal of 21,000, Musk said last week.
Short sellers who bailed on their positions during the Tesla rally may buy put options in an attempt to recover losses, according to Robert Piton, a senior equity analyst at Chicago-based TJM Institutional Services LLC.
The four most-owned options on the stock are bearish. January 2015 $30 puts, with an exercise price 78 percent below yesterday’s close of $137.80, had the highest ownership, followed by January 2015 $18 puts and December 2013 $60 puts.
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, rose 1.7 percent to 13.04 at 10:54 a.m. in New York. Europe’s VStoxx Index slipped 0.7 percent to 17.15.
More traders are holding bearish Tesla options than bullish ones. Open interest for puts reached a record 484,000 on Nov. 7, a 31 percent increase from the beginning of the month, data compiled by Bloomberg show. At the same time, the number of calls climbed 49 percent to approximately 463,000 contracts.
“The stock appears as though it might test the $131 to $132 level and if it can’t hold that level, it might trade down to its 200-day moving average of around $105,” Piton said yesterday in an interview. “The options market seems to be pricing things accordingly with the potential for such a breakdown.”