Talk about taking it in the “shorts”. Tesla (ticker TSLA) has been on a remarkable rise. Since the end of May 2019 when TSLA closed at $185/share, the share price has increased 400% to $741/share. Most of the $556 move up has occurred since November 8, 2019 (TSLA was at $337/share, 72% of the increase). It has been a rocket ship straight up. Many in the market attribute the meteoric shot to what is called a “short squeeze.”
A trader is “short” a stock when they borrow it from another investor to sell it hoping that the price goes down in the future and they can pay back their stock-loan by buying a cheaper share. A short squeeze happens when the stock price goes up causing the short trader to amass significant losses and forcing them to buy into the rising market to pay back the stock-loan before their losses gets bigger. Rising prices beget more buying and voila, a stock is up over 200% in two months and 400% in eight months. It has happened to others in the past, notably to another car manufacturer (Volkswagen) in 2008 – though that stock was up 450% in one WEEK.
As of a few days ago, it was report by research firm S3 Partners that TSLA is the most shorted stock on the US exchanges. Approximately 18% of its “float” (the number of shares trading on public markets) is sold short. The second most-shorted stock is Apple (ticker AAPL) with less than 1% of its float sold-short. This saga isn’t likely over.
The old saying is that “markets can stay irrational longer than you can stay solvent.” One moral from this tale is to resist strategies which put the achievement of your portfolio goal at risk based upon the path of returns.
It is also a good reminder that asset price movements on a given day, month, or year is not necessarily driven by fundamentals. Valuation is the best guide to future returns, but analysis has shown that it takes at least seven years before valuation explains the significant majority (>70%) of equity returns and its highest significance isn’t reached until beyond ten years.
In the meantime, it is best not to be caught in a squeeze.
Will Skeean, CFA
Partner – Investment Management Team Chair
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