How Tesla Short Sellers Lost the Plot in Q4

  • Tesla (TSLA) is among the most shorted stocks in US stock markets. While Tesla short sellers had a great ride in this year’s first three quarters, they have burned their fingers in Q4.
  • Tesla’s short interest has fallen gradually since mid-October. Its short interest is now at its lowest since February.

Tesla is among short sellers’ favorite stocks. Before we look at Tesla’s short sellers and short interest, let’s look at how to interpret a stock’s short positions. We can look at its absolute short volumes, the short interest. We can divide a stock’s short interest by its average daily traded volumes and arrive at the short interest ratio. The short interest ratio is also called the “days-to-cover ratio,” as it tells us how many days it would take for shorts to cover their positions. We can also divide a stock’s short volumes by its market capitalization.

Short interest tells us how bearish the market is on a stock. High short interest can trigger a short squeeze, where bears have to square off their positions if the stock’s price rises. This squeeze triggers a domino effect as stock prices rise even further and short sellers scramble to cover their open positions. Something similar has happened to Tesla’s short sellers in Q4.

TSLA short interest continues to fall

Tesla’s short interest fell from 37,186,793 on October 15 to 28,651,737 on November 29. Its short interest ratio fell from 4.50 to 3.67 in that period. Currently, Tesla’s short interest is at its lowest since February. The biggest fall in Tesla’s short interest came between October 15 and 31. TSLA reported its Q3 earnings on October 23, beating expectations. Tesla short sellers had built their positions expecting another loss from the company. However, the surprise profit triggered a short squeeze and several Tesla short sellers had to square off their positions.

Tesla short sellers Jim Chanos and David Einhorn

Jim Chanos and David Einhorn are two well-known Tesla short sellers. The spike in Tesla stock dented the returns of Einhorn’s Greenlight Capital in October. Musk and Einhorn engaged in a public battle over Tesla’s outlook. Einhorn also took a jab at the company’s solar operations.

Rough ride in Q4 for Tesla short sellers

Tesla short sellers’ rough ride continued in November. The good response received by the Cybertruck added to shorts’ woes, and broader equity markets were positive. Plus, there was no negative news about TSLA. Simply put, there was no fodder for Tesla short sellers.

In December, Tesla short sellers got more bad news as China is reportedly planning to offer subsidies for some TSLA models. The country is a big market for Tesla, and the subsidies would help level its playing field with domestic Chinese electric vehicle makers. Tesla is also reportedly planning to hike imported car prices in China next year. The move might further add to Tesla short sellers’ woes.

No respite from analysts

Several analysts have raised Tesla’s target price over the last month. Morgan Stanley has an “equal weight” rating on the stock, and Piper Jaffray called TSLA a “must-own” stock. There is, however, a lot of divergence in Tesla’s price targets. For more insights, read Tesla’s Price Targets Went from $0 to $4,000!

To sum it up, practically nothing went right for Tesla short sellers in the fourth quarter. With record deliveries and Q4 profits, bulls won the match, hands down. That said, 2020 could be a crucial year for Tesla, as it needs to deliver on several of its announcements. To learn more, read Can Tesla’s Surging Cybertruck Orders Lift Its Stock?