Hedge fund manager David Einhorn is just one of many shorting Tesla Inc (NASDAQ:TSLA) stock. According to S3 Partners Research, the short interest in TSLA stock as of August 3 was $9.03 billion, 37% higher than the next company.
Einhorn’s Greenlight Capital has performed miserably through the first six months of 2017, down 2.8% versus 9.3% for the S&P 500 Index. A quick look at Einhorn’s long-term performance shows that Greenlight achieved a 16.1% annualized total return net of fees from its inception in May 1996 through the end of 2016.
In other words, he knows a thing or two about investing.
Bubble Basket Bets
In 2016, Greenlight Capital’s short portfolio lost 11.7% with oil frackers, Amazon.com, Inc. (NASDAQ:AMZN) and Caterpillar Inc. (NYSE:CAT) doing most of the damage.
Amazon is part of what Einhorn calls the “bubble basket” which includes Tesla.
“Bubble basket stocks mostly don’t have profits, which makes them unlikely to benefit from corporate tax cuts,” Einhorn wrote in his Q4 2016 letter to investors. “Further, an accelerating economy should allow investors to find growth without needing to pay nosebleed prices for a narrow group of profitless top-line growth stocks.”
Heck, you can’t fault the logic. Unfortunately, Tesla isn’t your usual money-losing stock. Just the other day I saw a story about how a Model X beat a Lamborghini in a quarter-mile race in Florida setting a record time for an SUV in the process.
It’s this coolness factor that allowed the company to recently sell $1.8 billion of junk bonds paying 5.3% and due in 2025, $300 million more than originally planned. Many feel the coupon is way too low given Tesla’s risk, a big reason why it’s traded below $1.
“Anyone who looks at a lot of high-yield bonds would expect more robust protection against future debt,” Valerie Potenza, head of high-yield research at Xtract Research, a sister company of Debtwire, told MarketWatch ahead of the sale. “We think it’s a terrible bond, but people seem blinded by the Tesla story.”
Indeed they are.
But it can also be said that the electric market continues to grow as more car companies get serious about the transition from the combustion engine. Just the other day, I was at a local environmentally friendly tourist attraction near where I live, and there was a Chrysler Pacifica at a charging station getting fully “gassed” up.
Whether the oil companies like it or not, the world is changing, albeit at a slower pace than I ever thought possible.
Einhorn’s Theory
Einhorn believes that Elon Musk is a false prophet nowhere near the genius of Steve Jobs. He thinks that if you’re long TSLA stock, it’s because you think Tesla’s the next Apple Inc. (NASDAQ:AAPL). He fails to consider that many investors who are in the stock because of Musk — and by extension, Tesla — see the world as a place where pollutants such as oil are a thing of the past. That is an entirely different hypothesis.
GM is capitalized to survive any foreseeable downturn. It has $20 billion in cash and a $14.5 billion undrawn revolver. Meanwhile, it is currently generating billions of dollars in free cash flow,” wrote Einhorn in his Q2 2017 letter. “TSLA is capitalized to survive only the next three quarters. While its cars do not burn gasoline, the company burns more than enough cash to compensate, and behaves as if it will have access to nearly free capital for the foreseeable future.”
I guess this is Einhorn’s attempt at a subtle joke, one that makes the case for investing in Tesla in my opinion which, the last time I checked, was kicking GM’s butt all over the electric-vehicle playing field.
Bottom Line on TSLA Stock
I discussed Einhorn’s short early last month. Then, I was a lot more sympathetic to his short position. That sympathy has ebbed, however, I still felt like a Tesla investment makes sense for certain investors.
“So, if I’m an investor living in Des Moines with a wife, two kids, and a dog, I’m probably not going to buy Tesla stock because my number one rule of investing is to own stocks that make money, regardless of any valuation metric,” I wrote at the time. “However, if I’m Sandy in Palo Alto, my kids aren’t living at home, and I need a second car to drive, owning the car and the stock make a lot more sense.”
Personally, I think Einhorn’s CAT short is a worse move than Tesla because a recent M&A deal in Canada suggests the heavy equipment market is slowly improving. However, we’ll know more by the end of the year if Tesla’s going to make it.
That’s when the rubber meets the road for all TSLA followers — long and short.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
