Short-sellers continue to profit off their positions in Tesla, although one fund is bemoaning its missed opportunity after trimming the position in May. Aristides Fund LP was down 1.05% in May, while Aristides Fund QP, LP declined 0.95%. Year to date, Aristides Fund LP is up 4.01%, while the QP, LP fund gained 4.17%. The fund had a record $130.9 million in assets under management as of the beginning of this month.
Trimming their Tesla short
In his June 3 letter to investors, which was reviewed by ValueWalk, Managing Member Christopher Brown said he “feels bad” that they didn’t press their Tesla short a bit harder in May. He explained that Tesla shares ended April “at a very perilous point” on the long-term chart.
The stock plunged below the key long-term support of around $238 per share. Brown trimmed the fund's Tesla short because he was concerned the stock would bounce. As a result, Aristides only saw 128 basis points of gains from the 22% decline in Tesla stock in May.
In an email recently, Tesla CEO Elon Musk told employees that they could beat their quarterly production and delivery records if they execute well the rest of the quarter. However, Brown notes that the markets "didn't seem to believe him" because Tesla shares are "still languishing at two-year lows." He doesn't believe Musk either.
Tesla is dependent on "completely oblivious" people
Brown estimates about 75,000 deliveries for the second quarter with a lower average selling price than recorded in the first quarter. He also believes that the recently increased tax subsidies in some parts of Canada and the U.K.'s first Model 3 orders may cause some "uncertainty to the upside."
He noted that Troy Teslike’s crowd-sourced Model 3 worksheet indicated that the company received almost no orders for the car in January and February. Despite that, Tesla stock only declined 4%. Model 3 orders picked up “to a decent but not amazing pace in March, April and May,” but while that happened, Tesla shares plunged 42%, he noted.
"This stock is so dependent upon trades made by completely oblivious/hopeful people that it is hard to know what assumptions are built into the share price on any given day," he summarized.
Still shorting pot stock Tilray
Aristides also continues to short marijuana producer Tilray, as do several other big funds like Lakewood Capital. The stock continues to decline, and Brown expects it to keep falling. It fell to around $43 last week, and he selected it as his short bet for the next 11 months at the Craig-Hallum idea dinner.
Even though Tilray is down 87.5% from its record high, the company is still valued at almost $4 billion, which is 10 times estimated 2020 revenue. Brown believes a multiple of 2 times "is probably more than appropriate," and it would value the shares at $9.50 each.
He sees the biggest risk to his Tilray short as a large consumer brand making a multi-billion-dollar investment, but he sees this as "unlikely.'
Brown also highlighted his short thesis for Carvana, which he started to look at after Craig-Hallum based on a suggestion at the conference. He added that Aristides has "been involved to a smallish extent on the short side" with Carvana previously.
After studying theses from other short-sellers and Carvana management's responses to their work, he believes the company is "making its financial results look better by selling subprime loans to a related party… at prices above market rates, prices that nobody else would be willing to pay."
He added that he could make some guesses at how a scheme like this might work, but he doesn't want to be "sued for libel," so that's all he will say about it. He did increase Aristides' short position in Carvana last week.
"I believe the market will eventually figure this out, and it may happen sooner rather than later if there is a recession and corresponding deterioration in auto loan delinquency rates," he explained.
Best- and worst-performing positions in May
On the long side, the fund's best-performing position was Charles and Colvard, a maker of high-end moissanite gemstone jewelry. He believes the company's management is executing well and notes that its sales are up and increasing "with an ideal demographic," which is younger women. Over 50% of the company's sales are made online, and more than 50% of its online sales are done through its own website. Aristides holds a 4% stake in Charles and Colvard.
The only major losing position the fund held in May was a cryptocurrency arbitrage trade, which reduced its return by a little over 1% gross. Brown declined to give more details on this trade because he would like to do more of it in the future. In fact, he still likes this trade and sees a "very favorable risk/reward" looking forward.
Going ahead, Brown sees some sectors as risky in the current environment, like community banks. He also said they may adjust the fund's portfolio to protect against a possible recession in the near future.
This article first appeared on ValueWalk Premium