Getting back to Shortville
Disclaimer: this is not investment advice. Before taking any investment decision, do your own research.
Tesla shorts have been running away in the last year and a half, either by choice or forced. Lately I’ve been wondering if they will ever come back in a strong way. It seems to me that the incredible run from 35 to 650 (split adjusted) since June 2019 has shaken of a lot of the less disciplined fanatics that were shorting Tesla on faith. But what about the professional shorts, the ones that look at valuation without ignoring possibilities? From my point of view, it looks like Tesla is getting more temping for them each week.
Lets review some data points that make me be wary about a strong shorts comeback.
Short Interest as percent of float
Although in dollar amount Short Interest is near its highs, in shares shorted and percent of float is the lowest it has been the whole year.
It’s even the lowest in years. There’s a lot of room for shorting.
US markets in all time highs
The second data point is noting that the most important US indexes are all in all time highs. Being Tesla a high beta stock, a change in the tide can make shorting it a lot more tempting. I don’t see an imminent bear market, but records highs with record valuations (see next section) makes a bear market a very real possibility.
S&P 500 CAPE at highest point out of Internet bubble (worse than 1929)
Using Shiller’s Cyclically Adjusted PE Ratio, S&P 500 is the most expensive it has been outside of the 1999 Internet bubble. This is the most troubling data point in this article.
Tesla stock price is expensive compared with its own history
I use a 1.5 exponential growth curve to estimate how much the stock price deviates from what Tesla’s revenues has been growing over the years and what Elon Musk believes is reasonable for the future.
Based on this we can see that 2018 and 2019 the stock was widely undervalued and is now quite overvalued.
It’s even easier to see if we just plot the normalized difference from 1.5 growth.
In this chart, one (1) is the average difference to a 1.5 growth curve. The highest value is a 2.72 times a 1.5 growth curve. The lowest value is 0.23 times. Assuming a 650 price Today (2020–12–08) would be 2.23 times. To match the 2.72 highest value from 2014 the stock should be 794 USD, which would make it the most expensive since IPO based on this model.
The other metric I checked recently is market cap/revenues. Based on 608 billions market cap and 32 billions revenues estimate for 2020 the metric results at 19. The highest previous value was in 2011 at 14 (I only calculated end of year values except for 2Q2019.) The lowest value was 2Q2019 at 1.3 times (32.77 billions /24.94 billions.) Assuming 65 billions revenues next year, it would be 9 times based on same market cap.
Not only Tesla
It’s common to find a justification for Tesla’s price based on other companies. That doesn’t make it reasonable though. This article from Charioteer Investing quotes Scott McNealy on the absurdity of valuing companies at 10x sales in the Internet bubble. The article shows 202 companies that now are over 10x forward sales. As I mentioned in previous section, Tesla is now at 19x 2020 revenues.
S&P Inclusion
The last contextual data point is S&P inclusion. There’s a lot of speculation on how much the stock will have to increase in price so that all the buying pressure from index funds get their hands on the required shares. I’m not going to add to that speculation, but I will say that based on pasts events, it is only a temporary increase and long term it doesn’t make much of a difference to a stock. The only reason I mention it here is that it marks a very interesting point to get into a short position, a few weeks after the dust settles.
Are we going lower from here?
There’s no way of telling where the stock will go from here (not that I know of.) My objective is to be aware that we are at very high values based on quite a few measures, not only for Tesla but for USA markets in general (specially technology.) I don’t see the whole market crashing immediately, since economic factors seem to be positive lately and people are getting optimistic after a horrific pandemic year (vaccines.) But at this point I wouldn’t be surprised by a market collapse at any point either.
My best guess is that the growing optimism added to the very high speculation we had lately, the markets will go higher at a faster pace for a little while, marking the typical “melt up” that ends a bubble.
But other possibilities seems quite likely too: lateralization, correction, etc. The only real conclusion is that longer term I don’t expect for valuations to keep going higher, which means either stock prices lag earnings growth or some kind of correction is in the horizon. The higher the CAPE goes, the greater the correction I would expect.
But is this actionable? Not really. It’s very easy to lose a lot of gains by trying to hedge or time the market. But it is good to prepare psychologically for a big drop. And avoid margins.
