“For the haters out there I am no profitable on my TSLA short. $TSLA” – Douglas Kass on Twitter, Feb. 20.
Hedge fund manager Doug Kass came out guns blazing last Thursday, announcing that his Tesla Motors (TSLA) short was profitable despite the huge jump in the price of Tesla stock in after-hours the night before.
Kass went short TSLA stock prior to the company’s earnings release, which proved to be a mistake. Tesla surprised with a rosier-than-expected outlook, and shares rose more than 14% after hours. Kass used the market euphoria as an opportunity to double down, adding to his short at prices between $218 and $224. According to Kass, his cost basis on the trade works out to an average of $212 per share.
Calling the top on a hot momentum stock is next to impossible, and Kass knows this. This is why he started with a small position, adding to it in increments. But while I agree with Kass that Tesla is wildly overvalued, I’m going to have to scold him on one point: He broke his own trading rules.
According to the Wall Street Journal,
“Mr. Kass acknowledged that he normally doesn’t take short positions in stocks with heavy short interest. Tesla’s…short interest is roughly 24% of shares outstanding.
‘This goes directly against one of my short selling tenets — namely, shorting high interest stocks,’ Mr. Kass said.”
Again, I agree with Kass that TSLA stock is overvalued and that shorting Tesla makes all the sense in the world. It’s a fad stock with no profits that sells fewer cars in a year than Chevrolet does in three days.
TSLA stock trades for 117 times expected 2014 earnings and 12 times sales. As a point of comparison, General Motors (GM) trades for 7 times expected earnings and 0.3 times sales. Tesla’s market cap is nearly half that of GM, despite the ridiculously large gap in the size of the respective operations.
I see no realistic case whereby this company grows into its stock’s valuation.
But an experienced trader like Kass should stick to his trading rules. Nearly every embarrassing loss in my career has come as a direct result of sloppy discipline: making exceptions on stop-losses, shorting stocks as an emotional knee-jerk reaction to what I see as irrational exuberance, losing patience and buying (or selling) before my ideal conditions were in place, etc.
Kass might end up being wildly successful on his Tesla short in spite of his lack of discipline. But I’m not following him into this trade just yet. At Tesla’s level of overvaluation, it could drop by 75% and still be pricey.
But right now, TSLA stock has momentum. And the market can stay irrational longer than I can stay solvent.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.