Tesla Motors (Nasdaq: TSLA) stock attracts short sellers


Despite the high tech electric propulsion and the lightweight of the aluminum body of the Tesla S Model, Tesla Motors stock is under plenty of pressure by short sellers. Question is, what does this mean for investors?

[Market Close Update: TSLA closed at 27.58] But based on the short-interest ratio, Tesla (Nasdaq: TSLA) stock still has about 10.6 days to cover all of the outstanding short positions.

When a trader is short a stock, he profits when the stock price goes down, and suffer losses when the stock price goes up. The total number of short shares in a stock is called the "short interest".

Stocks with high short interest are often very volatile and are well known for making explosive upside moves, known as a short squeeze. Stock traders will often flock to such stocks for no reason other than the fact that they have a high short interest, and the price can potentially move up very quickly as traders with open short positions move to cover.

In the case of every high, short-interest stock like Tesla, high short interest can mean one of two things. The shorts are right about the fundamental outlook; so the stock is being looked unfavorably and will go down. Or the short sellers are wrong, and any upside news will literally squeeze them into buying back their shares, thus exacerbating the move to the upside. This is an indicator of upside potential in a stock and the higher this number, the more powerful the upside potential a stock has if a short covering should be triggered.

Which camp Tesla stock is really in is up for debate

On the fundamental side, Tesla is not making any money yet.

On the short-interest side, HighShortInterest.com provides a convenient sorted database of stocks which have a short interest of over 20 percent; and Tesla stock is on that list. Additional key data such as the float, number of outstanding shares, and company industry is also displayed.

And according to an article at Investorplace.com by Tom Taulli, author if “All About Short Selling” who also has an upcoming book called “All About Commodities,” Tesla will need to demonstrate that it can develop a car for masses. The problem is that other rivals, such as General Motors Company (NYSE: GM) and Nissan, are doing the same thing. And, they have the advantage of huge distribution, scalable operations and mega brands.

As a former designer within the industry and now a trader, I tend to agree with his assessment. However, this does not take away from my respect for the Tesla technology, the product development and the people at Tesla. My own interview with Tesla engineers at the 2011 North American International Auto Show was quite positive. Read: Tesla Model S illuminates aluminum-body structure at 2011 Detroit Auto Show

Then again, trading stocks is not a personality game. It’s all about earnings and earnings potential. And Tesla still has a long row to hoe.

Nonetheless, I especially like its alignment with Toyota. And I wonder how much these short sellers are overlooking that fact as the summer earnings season is upon us.

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Comments

Did you see that short squeeze that happened today?

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