(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of TSLA.)
The situation for the short sellers in Tesla Inc. (TSLA) is going from bad to worse, with the stock rising by over 9.7% on Wednesday following the company’s annual meeting, handing short sellers potentially big losses. According to S3 Analytics, $11 billion of short sellers were down $1.1 billion in mark-to-market losses on Tesla's surging shares. Tesla's CEO Elon Musk noted that the company was likely to hit its production target of 5,000 units per week for the Model 3, its new four-door mass-market all-electric sedan.
The problem for the shorts is that the sharp spike in the price today has also led to the stock breaking out above a critical technical resistance level, and that could spur the stock to go even higher, making the losses for shor sellers even greater. As of May 15, the latest short interest reports showed that a record number of skeptics were betting against Tesla with nearly 39 million shares short, representing 33% of the company's float.
Short Sellers Struggle
Short sellers were piling into Tesla to bet against the stock at the end of March as concerns mounted that Tesla would fall well short of its production quota of 2,500 Model 3 units per week, while also betting the company would need to raise capital, further pressuring shares. The short interest climbed by about 37% starting March 15, rising from 28.38 million to 38.9 million as of May 15, a massive rise. But many of those short sellers were also likely shorting shares below its current price, probably handing them a hefty loss. The last time the stock closed above $310 was back on March 21.
Technical Break Out
With the shares rocketing higher today, they also rose above a very important resistance price at $309.25, which the stock has not been able to rise above on multiple attempts, a big positive for the bulls. Additionally, the chart shows a surge in volume when the stock rose above that resistance level, another positive sign.
There are minor resistance levels above the breakout price, but the oldest and strongest level of resistance in the chart doesn't come until $362, nearly 16% higher than its current price around $312.50.
The other potential risk to short sellers may be themselves. To close out their positions, shares of the stock may rise as they buy back their shorted shares, creating a potential short squeeze.
Shorts can only hope that Tesla doesn't hit its Model 3 production target. It may be their only hope.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.