Tesla Motors Inc (NASDAQ:TSLA) was one of the most-shorted stocks earlier this year, but the shorts have gotten burned repeatedly over the last 10 months. Jeffrey Gundlach said a couple of months ago that he was “scared to death to short Tesla.” Nonetheless, one analyst thinks this is the time to short it, but is it really a good idea to bet against Elon Musk? Especially going into the company’s next earnings report?
Will Tesla return to fundamentals?
One of the big reasons Tesla Motors Inc (NASDAQ:TSLA) shares fell more than 4% today may be because of this report from Michael Purves of Weeden & Co. Steven Russolillo of The Wall Street Journal covered his report. Purves acknowledges that Tesla shorters have gotten burned repeatedly this year as the stock has risen more than 400%, but he thinks the company’s recent downward momentum will turn into a trend. Since hitting a new high just under $195 a share on Sept. 30, Tesla shares have declined 17%.
ValueWalk's Raul Panganiban interviews Dr. Kathryn Kaminski, Chief Research Strategist at AlphaSimplex, and discuss her approach to investing and the trends she is seeing in regards to quant investing and hedge funds. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with AlphaSimplex's Read More
Purves believes this year’s rally is ending because Tesla shares have become “so divorced from fundamentals.” He suggests that discussion should turn to technical analysis now and that the rally is going to end. He thinks shares will fall quickly.
Why Purves thinks Tesla is a short
He provided several reasons he sees Tesla Motors Inc (NASDAQ:TSLA) as a good short position. First, he says since the stock’s uptrend has broken, it has remained around the 21 day simple moving average and the 45 day SMA. He says both supports are broken now. In addition, he sees that a head and shoulders has been established on tesla’s stock chart, starting in August. He said the neckline has just broken.
He also notes that the volume of trades on Tesla Motors Inc (NASDAQ:TSLA) shares is higher on days when the stock is down. And finally, he said the company’s daily relative strength indexes have been “trending steadily downwards.” He said the company’s shares have been in “very overbought conditions” and that this “pattern of non-confirming weekly RSIs” was one of Apple Inc. (NASDAQ:AAPL)’s key sell signals when it hit its all-time high last September.
Taking options on Tesla
Purves recommends a Nov. 15 $155 / $135 put spread at a price of $5.65, which means investors could buy the November $155 put and sell 100 shares at that price through Nov. 15. They could also sell the $135 put to cut the cost if need be. He sees a maximum profit of $1,435 per contract with this option.
Options buying may make sense for some investors in this situation since Tesla Motors Inc (NASDAQ:TSLA) has been such a cult stock. It enables them to hedge their bets in case the company continues to defy odds (and it very well might, especially after its Nov. 5 earnings report). History has shown us that shorting the stock outright causes nothing but pain, although interestingly enough, Jim Chanos hinted earlier this month that he might be shorting Tesla. His comments on the matter were unclear, however.