The "Short Burn of the Century" Seems to be Taking Shape in Tesla

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Shares in Tesla(TSLA) are up 3% - after trading up as much as 6% - on Tuesday, building on a nearly 5% gain on Monday. At the current price of $343/share, Tesla has now gained an astonishing 24% since hitting recent lows of $275/share on May 22nd.

The most recent news is that an analyst conducted his own survey of 20 Tesla sales centers and found a large reported increase in recent Model 3 deliveries. This new information convinced him to raise his estimate for Model 3 deliveries in Q2 from 20,000 to 30,000. It's the latest in a series of positive news items for the company tat began at the Annual Shareholders' Meeting last week at which CEO Elon Musk announced that Tesla would be able to produce 5,000 Model 3s per week by the end of June.

Here's a brief timeline of recent developments for Tesla:

May 2nd - Tesla reports positive earnings, but Musk holds the now infamous press conference in which he dismisses several analyst questions as "Dry" and "Boneheaded." He adds that investors who have a distaste for volatility shouldn't bother owning the stock.

May 4th - Musk tweets about the "short burn" to come.

May 8th - Musk personally buys an additional $10M worth of Tesla shares, adding to his 20% stake in the company.

June 1st - A report in a German business journal details a reverse engineering project on a Model 3 which found impressive design features, a significant reduction in the amount of expensive Cobalt used in the batteries and a low estimate of the overall cost of production. (Read about it here>>)

June 5th - Tesla Annual Shareholder Meeting. Musk is retained as Chairman of the Board and three Musk- friendly board members are re-confirmed. The CEO states that 5,000 Model 3s per week will likely be produced by the end of Q2. Tesla also reveals plans for a second Gigafactory in Shanghai, China.

June 10th - Tesla announces that the most recent update of its Autopilot software will allow further autonomous driving functions to be enabled.

June 12th - KeyBanc analyst Brad Erikson raises production estimate 50%

June 12th - Tesla announces layoffs of 9% of its workforce, primarily white collared salary jobs as part of its previously announced desire to flatten is management structure. The goal reported to move toward toward sustained profitability. Production goals are unchanged.

While the 50% increase in expected deliveries is certainly a positive development for Tesla, the market reaction seems to be somewhat out of proportion, given that some of these numbers, while far from certain, were already an established possibility being floated by those presenting a bullish thesis for the company.

The incredible upward price pressure seen over the past few days is probably largely the result of short covering. Short interest in Tesla shares has grown from around 30 million at the beginning of 2018 to 39 million on May 31st, the most recent report available. This means the total losses in those short positions is now near $3 billion.

Read more about the mechanics of the short situation in Tesla on Zacks.com here>> and here>>

The market participants in the shares right now can be broken down into a few broad categories:

Musk - 20% (self-explanatory) he's not selling.

Institutional Investors - 61% as Tesla shares rise, there's actually an incentive for money managers to get on board to avoid underperforming the funds that are already invested, though some long-term holders may take the opportunity to lighten up by taking some profits on the rally.

Retail Investors - (approximately 19%) Most individual investors in Tesla are in for the long term and aren't particularly interested in selling out. Tesla's status as a "cult" stock attracts a dedicated breed of investor who sees the company as the one of the biggest companies in the world years or decades from now and who is not enticed to sell by a quick rally.

Strong and Weak Shorts - Short selling is a complicated rational and emotional enterprise because of the Catch-22 of big rallies. Investors who think a stock is overvalued at a given price (and have sold it short) only become more convinced that the valuation doesn't make sense if the price rises. While the most recent price move has been painful, it's easy to imagine the better-capitalized short players are now more bearish than ever and more certain than ever of the premise of their position.

Unfortunately for the shorts, much of the buying in a short-squeeze is not voluntary. An old adage - frequently attributed to the great economist John Maynard Keynes (who was unfortunately not a great investor) - states "The markets can remain irrational longer than you can remain solvent."

When share prices rise rapidly, many shorts who would otherwise choose to stay short are forced out of their positions due to any one of a number of reasons - margin calls, an attempt to avoid reporting drawdowns to investors, forced buying by risk management at big firms, and the basic desire simply to not to get fired and/or go out of business.

We won't now for sure how the short interest has changed until the most recent bi-monthly report is released after this week, but it's a fair bet that at least some shorts have thrown in the towel during the most recent rally. Meeting production goals and achieving profitability are the most important factors in the company's long-term prospects, but in the immediate future, the positioning of various market participants and current news is likely to drive daily moves in the shares.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks
Referenced Symbols: TSLA

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