Why we sold Tesla ... and are now short EVs

"These young investors have made so much money that you need to take them seriously...In the end, we need to adjust ... not them. Not totally adjust but we need to understand them. You know why? One word. Tesla. The stock is up 677% on the year, and that move has changed everything." Jim Cramer - Dec 8, 2020


This is not investing advice. Seek a financial professional before making important financial decisions. Nothing we say or write is a recommendation to buy/sell/or trade any security.


Key Takeaways


Why we sold Tesla ...

  • EV Speculation is rampant - Price bubble in Nio, Plug, GM, Nikola … and other companies trying to be more like Tesla indicates there is a bubble in EV valuations generally. Tesla is caught up in speculative buying at any price.

  • Pandemic Stock Headwinds - Tesla faces headwinds from dealerships opening back up and a return to using mass transit. Tesla is a “Pandemic Stock” because it was the only online retail car company.

  • Positive Catalysts are Remote - Autonomous driving is the biggest value driver for Tesla … but this is unlikely to play out within the next 6-12 months.

and are now short EVs ...

  • Call Option Bubble Pop - Retail investors have been pushing up the price by buying call options at 300% premiums compared to a year ago … this is irrational exuberance. Pain on Wednesday’s 7% selloff appears to have caused an unwinding of call option positions that would lead to broker dealers dumping the stock.

  • Technicals at extremes - Price is stretched relative 200 day moving average, 50 day, and RSI reading more than any point in history. Price is up 55% from announcement of being added to S&P 500 … front running has largely played out. Tesla gets added to S&P 500 on December 18th, giving front-runners one week to get out.

  • Short Squeeze is over … percent of shares sold short is at record lows.


Background


We made one big investment in 2019 ... and that was Tesla. It's been a great run. We made 1,600% in 18 months. But great companies do not always make great investments.

Tesla was our largest stock position until December 9th for reasons we explained in the video below. Specifically, we believe Tesla will win the race toward autonomous driving, will be a leader in the rapidly growing solar industry, and is attracting many of the world's brightest engineers. Tesla's future is bright...but not because it sells electric cars.

Electric cars are simple. They have 10% of the moving parts and 30% of the maintenance costs of ICE vehicles. The fact that Tesla is the leader in EVs is not what makes the company so valuable. But EVs are one reason why the price has run up so far and so fast.


Retail investors have been discovering what we were so vocal about in April/May of 2019 ... that Elon Musk is a genius, EVs and solar energy are the future, Tesla is the leader in both, and looks to be leading the way for autonomous driving. As a result, retail investors have been piled into Tesla...any every other EV and solar company they can get their hands on.


A Call Option Bubble has emerged as we discussed here. EV companies are one of their favorite gambles. Our first reaction to this was to try hedging our Tesla exposure by shorting other EV companies like $NIO $PLUG $NKLA ... but $TSLA is at the heart of this bubble so trying to protect our position proved to be far harder then to simply sell.

The future is bright for Tesla...and we did not intend to sell our position in its entirely when we bought in May 2019. But the near term risks to Tesla are very high and catalysts to push Tesla to materially new highs are perhaps 6-12 months off.


We detail the reasons for selling ... and shorting below.



Why we sold Tesla ...

  1. EV Speculation is rampant - Price bubble in Nio, Plug, GM, Nikola … and other companies trying to be more like Tesla indicates there is a bubble in EV valuations generally. Tesla is caught up in speculative buying at any price.

  2. Reopening Headwinds - Tesla faces headwinds from dealerships opening back up and a return to using mass transit. Tesla is a “Pandemic Stock” because it was the only online retail car company.

  3. Positive Catalysts are Remote - Autonomous driving is the biggest value driver for Tesla … but this is unlikely to play out within the next 6-12 months.


1. EV Speculation is Rampant


Perhaps the best evidence of EV mania is the degree to which investors are willing to buy SPACs to get exposure. NASDAQ published this headline on December 8th ... "SPAC Merger Becomes the Trendiest EV IPO Route of 2020". This should scare EV investors...even those that believe in the technology long term like us.


Special Purpose Acquisition Companies (SPAC) are created for the sole purposes of buying an existing private company. A SPAC can funded privately or publicly. They are not new, but have become popular over the past two years. SPACs generally have two years to acquire a target company, but the target is unknown when first created. For this reason...SPACs are sometimes referred to as "Blank Check" companies.


We are looking Having the nickname "Blank Check" company is a sign of the potential mania in risk assets generally, but they have been especially popular for EV companies.


SPACs have some benefits that we should consider when evaluating their recent popularity. One big advantage is the faster IPO process compared for the acquired company. Going public is generally more complex and costly then being acquired. SPACs also give retail investors access, albeit indirectly, to private company equity that they would otherwise have trouble achieving in public markets.


Nikola provides a near perfect example of investor mania in electric vehicles. VectoIQ raised $200 million in a May 2018 IPO. In March 2020, the SPAC agreed to merge with Nikola Corp at an implied enterprise value of about $3.3 billion after running up over 300% following the announcement

The ticker VTIQ switched to new ticker NKLA on Thursday, June 4 after running up over 300% following the acquisition announcement. Nikola more than doubled in a week after NKLA officially began trading. To us...this was clearly a bubble (tweet below). Nikola had had yet to produce a dollar of revenue, and yet they had a market cap of $27.4 when we pointed this out publicly.

EVs are not going to be a great business. They will be commoditized. We detailed our reasons for this view in a previous article. One result of this is falling global car sales. But despite the competitiveness in this market...any car company that even talks about building EVs is seeing their valuation skyrocket.


EV companies are going public rapidly. Li Auto and XPeng are two of many EV companies that had their IPOs in the latter half of 2020 ... attempting to take advantage of retail investors willing to buy anything related to EVs at just about any price. Both are up about 100% in the past few months. More are coming.


What happens to price again when supply increases rapidly?



2. Reopening Headwinds


We started shorting some stocks that benefited from the pandemic in early September. We discussed the reasons why in our election strategy post and on Periscope. The reason comes down to the psychology surrounding stocks that benefited from the pandemic. Investors bid up prices on stocks like Zoom, Peloton, and Amazon because there were very few companies that benefited from the pandemic. Tesla was one of them because it is the only car company that is completely online.


What happens to the scarcity of companies with a bright future when the pandemic is finally behind us?


Tesla didn't experience any drop in sales because of the pandemic. One reason is that all the dealerships were closed. Every other car company relies on dealerships. Dealerships are opening up across the country. Tesla beat expectations on sales during just about every quarter of the pandemic.


What happens over the next year when households are increasingly moving back toward public transit and can once have the option to buy a car from a dealership?



3. Positive Catalysts are Remote


Perhaps the single most valuable part of Tesla is their lead in autonomous driving. The potential for an autonomous Taxi market is difficult to overstate...as we articulated in our video on "Why we bought Tesla". But its not clear when this will become a reality.


Meanwhile...just about every other catalyst has already come to pass...

  • Profitability - Check

  • Recognition that EVs are the future - Check

  • Recognition that solar is the future - Check

  • Recognition that Elon is a genius, not crazy (or at least both) - Check

  • Short Squeeze is over - Check

  • Everyone and their Grandmother believes Tesla is a great company - Check

  • Adding to S&P 500 - Check

What about near term catalysts to the downside?



Why we are short EVs ...


Some of the reasons why we are short EVs should be evident from the reasons we sold Tesla. But shorting a bubble only works if you get the timing right. Otherwise...you lose your shirt. So here is the short list again on why we think now is a good time to short.

  1. Call Option Bubble Pop - Retail investors have been pushing up the price by buying call options at 300% premiums compared to a year ago … this is irrational exuberance. Pain on Wednesday’s 7% selloff appears to have caused an unwinding of call option positions that would lead to broker dealers dumping the stock.

  2. Technicals at extremes - Price is stretched relative 200 day moving average, 50 day, and RSI reading more than any point in history. Price is up 55% from announcement of being added to S&P 500 … front running has largely played out. Tesla gets added to S&P 500 on December 18th, giving front-runners one week to get out.

  3. Short Squeeze is over … percent of shares sold short is at record lows.


Tesla is one of the most traded stocks options in the market ... but Google Trends suggest that it isn't just caught up in the Call Option Bubble. It started it.


There are at least 15 other EV car makers and suppliers that are riding Tesla's coat tails. If you see any we missed then please let us know. After Tesla...the next biggest by market cap are Nio, XPeng, and Li Auto. We are also looking at shorting PLUG because we are very skeptical that hydrogen fuel cells will ever be viable compared to solar.

As we discussed in our article on the Call Option Bubble...the bubble tends to pop, at least temporarily, after a day in which call option holders lose a lot of monye. That happened for Tesla on Wednesday when the price tanked 8% in a day. The last time Tesla suffered such a big drop was early September post the stock split. Investors front running the split dumped the shares right after.

Before the split Tesla skyrocketed despite the fact that a stock split should have no material impact on the company's intrinsic value. That did not stop retail investors from buying the narrative...in part with call options forcing broker dealers to follow. Then the pain came and the momentum went into reverse.


Does any of this sound familiar? ... Tesla is up 55% since the announcement that it would be added to the S&P 500.

Tesla is the world's leader in EVs, solar, and autonomous driving. Its valuation reflects this reality. But the valuations on EV companies hoping to follow Tesla's success are insane. Many don't even have sales with which to calculate a PS ratio. Nikola's PS ratio of 49531 is probably an error as its never sold a car.

Conclusion


Tesla is a great company. That's why we bought it in May of 2019 and told our followers to stop following us if we were wrong. But not all great companies make for great investments.


We believe that Tesla is caught up in a speculative bubble that started rational ... with the realization that EVs and solar are the future. This recognition led to the biggest short squeeze in history. Everyone who bet against Elon Musk has been proven wrong. Nearly all have given up...

Tesla is leading the clean energy revolution and we are glad to see the world coming to this recognition. Tesla's higher stock price is allowing cheaper cost of funds. Elon Musk is using this opportunity to issue more shares (although not as much as Michael Burry has suggested) so that his promise of a cleaner future can come even faster.


We think Tesla is fairly valued. But the speculative nature of retail investors willing to buy EV related stocks at any price makes the near term risks negative skew ... especially give the obvious parallels between the runup pre-stock split in late August and the runup before the next week's addition to the S&P 500.

So if you are a Tesla bull, think Elon Musk is a genius, and believe EVs and solar are the future...we agree...but that doesn't make Tesla a good investment. The signs of mania and fraud in EVs is everywhere.


We bought Tesla in May of 2019 because it was hated. Today ... it's the opposite.


Sincerely,

Bernard Baruch




This is not investing advice. Seek a financial professional before making important financial decisions. Nothing we say or write is a recommendation to buy/sell/or trade any security.