Interesting Short Behavior Around This Automaker

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Tesla Motors (NASDAQ: TSLA) wasn’t supposed to post a profit or beat delivery expectations. Then it reported that it did both. Over the next several days, a wave of buying caused by both bullish investors and covering shorts sent the stock from the $50 range well into the $80 range before the share price eventually topped $100 a share in late May. Through this, many shorts were squeezed out in a classic “short squeeze” scenario. But are shorts coming back to Tesla? Let’s look at data from to find out.

A short story

Tesla shorts got burned badly; especially the ones who held their shares through the Q1 earnings call. Looking at the data below, we can see that some shorts were already covering the positions in the month before the announcement. At the beginning of April, Tesla CEO Elon Musk told the public that Tesla would be profitable for Q1 and raised the number of expected deliveries.

This announcement drove some shorts away and their departure helped the stock to break the $40 level that had restrained upward movement for so long. With this level broken and more positive sentiment for Tesla, shares managed to climb into the $50 range before the announcement.

What happened from there is short squeeze history as the rate of covering shorts skyrocketed causing the share price to follow. Musk's “tsunami of hurt” prediction for shorts came true and Tesla even used the opportunity of the higher share price to raise capital in favorable conditions to have more spare cash and to pay off the Department of Energy loan.

Return of the shorts

In most short squeeze scenarios, the share price quickly surges before falling back down to earth in the following days or weeks. However, Tesla shares did not drop right back after the squeeze; in fact, they are near record highs as of this writing. Below is the NASDAQ’s data for Tesla’s short interest.

<table> <tbody> <tr> <td>Settlement date</td> <td>Short interest</td> </tr> <tr> <td>Jun. 28</td> <td>19.8 million</td> </tr> <tr> <td>Jun. 14</td> <td>19.9 million</td> </tr> <tr> <td>May 31</td> <td>18.6 million</td> </tr> <tr> <td>May 15</td> <td>23.0 million</td> </tr> <tr> <td>Apr. 30</td> <td>27.5 million</td> </tr> <tr> <td>Apr. 15</td> <td>30.7 million</td> </tr> <tr> <td>Mar. 28</td> <td>31.3 million</td> </tr> </tbody> </table>


We can see the sharp drop in shorts between Apr. 30 and May 15 as the announcement was made and the big squeeze began. And we can also see another drop between May 15 and May 30 and the share price continued to surge. However the share price has remained elevated, most of the time above $100, since the short squeeze bottomed out around the end of May.

The most likely reason for the share price to have remained this high, is there's a significant number of new buyers for Tesla, even at this higher price. Despite the short interest actually increasing by over one million shares between May 31 and Jun. 14, the share price held its higher levels.

It seems that even as the short interest is slowly rising again, the market actually values Tesla at its higher level. While there's a whole series of fundamentals vs. growth potential arguments to be made over whether the current price actually is reasonable, short interest data clearly shows that the current price is market value driven, not temporary short squeeze powered.

Another sustained post-squeeze price

In April, I wrote an article which argued for the possibility that Tesla Motors would experience a short squeeze similar to that of Netflix (NASDAQ: NFLX). As both a writer and a Tesla shareholder, I am quite pleased that the prediction came true and I do count it among by better ones. But the article from April did not address the many possibilities of what would happen after the squeeze. After all, it was more about whether the squeeze would happen than what the aftermath would be.

But in the case of Netflix, the provider has sustained its post-squeeze price quite well even moving higher than the initial squeeze price to pass $250 per share. Like Tesla, Netflix's squeezes were driven by actual news and continued interest from Wall Street has helped drive the price from there. Both Tesla and Netflix share a characteristic of being high growth stocks with share prices than reflect this when compared to current fundamentals. Even though valuation based investors may despise stocks like Tesla and Netflix, the market is always looking for the next big disrupting company and positive news from either of these two companies helps to build on a bull thesis for continual future growth.

Not all squeezes last forever

One of the core parts of having a share price maintain its elevated levels after a squeeze is the reason that drove the squeeze. In the case of Tesla and Netflix, they were better than expected numbers from closely watched companies. But conditions of demand outstripping supply are not as sustainable in the long run judged by the Volkswagen (NASDAQOTH: VLKAY) short squeeze. Sports car maker Porsche decided to attempt a takeover of Volkswagen and announced it has nearly cornered the market on Volkswagen shares. This sent a panic through Volkswagen short sellers who had rapidly covered their positions in an extremely tight market. The percentage increase in Volkswagen's share price was higher than that of Tesla or Netflix on the day of their announcements not because Volkswagen reported industry changing news but because there were so few shares to go around. 

In the following days, Volkswagen was no longer the most valuable company in the world as market assessed the fair value of the automaker around where it was before since no significant news had come out. Ironically, Volkswagen's current share price is still well below its short squeeze peak despite taking over Porsche and positioning itself for strong growth in the automotive market in the meantime.

Sustained price

After the initial few days of gains, many traders were calling for Tesla shares to return to the $50 or $60 range around where they were near before the squeeze. However, after the squeeze, new buyers of shares appear to have disagreed and the share price has well surpassed the $100 level. The short interest appears to be on the rebound and time will tell whether the short sellers are going to increase their short positions to the levels seen before the squeeze. Tesla and Netflix have some very important times ahead of them and we'll have to see how short sellers react to the companies and the market.

Alexander MacLennan owns shares of Tesla Motors. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends Netflix and Tesla Motors . The Motley Fool owns shares of Netflix and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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