Tesla (NASDAQ:TSLA) stock peaked on Feb. 19 and although it fell more than 60% from peak to trough, shares are now just 16% off the all-time highs. That has to drive the shorts nuts. But at the end of the day — and this is especially true for TSLA stock — you can either be right, or you can get paid.
The short sellers may have been or may still be right about Tesla. It may be an ineffectively run company with questionable financials and unstable leadership.
In the corporate world, Tesla may even be a joke.
But the stock is up more than 120% from its March lows and more than 350% from its one-year low. Bears that championed Tesla’s decline a few months ago due to the novel coronavirus had it all wrong. They were blinded by their bias, thinking it was the financials, shuttered plants and a company on the brink that brought down TSLA stock.
It wasn’t. It was the was the market-wide beatdown we saw in nearly every stock.
Price Trumps Opinion
In mid-2019, shares of Tesla were under fire. Many thought that this was the end and that Tesla was heading for a liquidity event. In May, the company raised several billion dollars and the stock bottomed when sentiment seemed to be peaking on the bear side.
Then, Tesla beat on second-quarter delivery expectations. From the June low, it was a nonstop pain trade for shorts, as they watched the stock rally.
Now about $130 away from its all-time high, there’s no telling what comes next. For all we know, shares will plunge 10% because CEO Elon Musk rips off a series of concerning tweets and says the stock price is too high. Or perhaps momentum traders get a hold of TSLA on the long side and squeeze it up over $1,000.
Observe the chart above, which highlights the short interest levels with the price of TSLA stock.
My point here isn’t to mock the bears or celebrate the bulls. No, my simple point is, don’t be the investor who gets steamrolled because they refuse to budge from their opinion. And in an effort to protect that opinion — to be right — those stubborn investors dig their heels in, refusing to change their opinion when the facts change.
There’s a difference between being short Tesla and having the conviction to not cover on any little rally. But it’s an entirely different reality to sit through a 100% or 200% equity loss (or more for those that are truly stubborn) just to hope you’ll be vindicated one day.
I’m not against shorting stocks, not in the least. But just like when we’re long and wrong, we need to bail and follow price.
Is TSLA the Best Automotive Stock?
Investors must realize a few things when it comes to TSLA stock and the automotive industry. First, the automotive business is not an easy one. Generally speaking, the margins are thin, the business is capital-intensive, and they are highly cyclical. When the economy takes a dip, automakers get hit as disposable income drops. Many consumers aren’t in a position to buy a new car as it is, let alone when they are struggling for work.
While the unemployment rate soared to 14.7% in the latest jobs report, that’s likely to be temporary. Even still, the automakers are losing a boatload of cash. But somehow, TSLA stock has stayed afloat.
|One-Year Return||YTD % Off High|
The second thing to realize is, Tesla does not trade like an automotive stock. It’s more volatile, but it’s less traditional. That’s clear from the table above. Meaning, it doesn’t trade with a low valuation amid muddling growth. There’s buzz, there’s excitement. Shareholders genuinely love Tesla with a passion.
While passion doesn’t contribute much to the bottom line, it can contribute to the valuation. Remember, Tesla is a growth company, it’s a technology company and it’s an energy company.
Yes, it could be run with better corporate governance, but it’s hard to deny the stock’s success. If you’re not put off by the automotive industry, TSLA may be one of the only stocks to consider buying in the group. That and Ferrari, which has superior margins, a passionate and wealthy customer base, and strong fundamentals.