As Tesla bears celebrate the electric-car maker’s stock decline on news of disappointing deliveries in the first quarter, many are soft-pedaling a key angle: Tesla reiterated its 2019 delivery guidance.
I’m not surprised. Tesla TSLA, -8.23% short-sellers, who bet on a decline in the shares, have recently displayed signs of hubris and mob-like overconfidence every time the stock falls into the $200s, as it continues to vastly underperform the S&P 500 Index SPX, +0.21% This suggests to me the electric-car company is more of a buy than a sell at these levels, in the contrarian sense.
Before we get to the details, an important disclaimer. During the past 23 years of covering U.S. stock markets, I’ve been lucky enough to work with some of the smartest “shorts” as sources, from David Rocker and Bill Fleckenstein, to Donn Vickrey and Manuel Asensio. I need to say this because otherwise I’ll be written off as a mere short-hater.
At their best, shorts expose accounting issues and fraud, which helps securities get priced accurately. This benefits us all because it directs capital to businesses that deserve it the most — the ones that will develop the best technologies and the most jobs.
“I think there’s a bit of irrationality coming from the short side.” Shawn Kim, automotive analyst at Gabelli Funds
Shorts typically do great research, and they’re usually sober-minded. After all, the losses on short sales can be theoretically infinite. But like bubble-crazed “longs,” shorts fall prey to sentiment extremes. Here are three signs that Tesla shorts are exhibiting these extremes, which support the bull case for the stock when it falls into the $260-$280 range — the price range that seems to embolden them.
Read: Tesla’s ‘ugly’ delivery numbers in the first quarter
They’re openly alluding that CEO Elon Musk is a felon
In a March 3 post at his website Adventures in Capitalism, investor Harris Kupperman shares the following headline: “Can’t spell felon without ELON.”
That’s clever. But I’m sure I’m not alone in seeing that and thinking I’ve missed the major development that Musk has been charged with a felony, or that he is about to be. Read on, and you’ll find no support for this. But these days, how many people read headlines, nod in bovine agreement as Tucker Carlson likes to say, and move on to the next snippet? Quite a few. This kind of suggestive headline is unfair to Musk, and a departure from the normal sober mindedness of short-sellers. So I’ll take it as a sign of hubris and overconfidence. (Technically, Kupperman bets against Tesla in the options market, not by shorting the stock.)
In a phone call, Kupperman walks back the felony allusion. Sort of.
“I am not accusing him of being a felon,” he says. “I just think you can’t spell felon without Elon, and I think that is an interesting coincidence. It’s tongue in cheek. I’m proud I thought that one up.” Fair enough. It is a nice turn of phrase.
But then, Kupperman cites detailed accounting analysis to support allegations of financial fraud, which brings us right back to possible felony charges. His site states Tesla is manipulating things like depreciation allowances, the capitalization of expenses and reserves for warranties — all classic tricks used to puff up numbers.
“I think the numbers are fake,” he says. “For people like me who have followed frauds for years, they have some telltale signs, and this has a lot of them. Have I gotten bombastic? I don’t know. I have a blog. I try to have fun with it.”
OK, but unfounded felony allusions? Seems more like hubris than fair play to me — or fun. “Something isn’t right,” responds Kupperman. “It’s a very tongue-in-cheek way of pointing out the obvious.”
They’re claiming Musk has a substance-abuse problem
In a March 13 post, Kupperman states Musk “is a compulsive liar who can’t stay sober.” He also says: “It has been many years since I have seen as good of a chance to take a shot on goal while the goalie is off doing drugs behind the stadium.”
This seems way over the top because, to my knowledge, there’s no evidence that Musk is addicted to drugs or alcohol and that he can’t stay sober. Posting serious allegations like these without evidence seems like some pretty blatant hubris by the bears. It also seems downright unfair to Musk. I know I’d be unhappy if it happened to me, and you would be too.
Sure, Musk has smoked what appeared to be marijuana on camera. A dumb move. And he’s tweeted drug references, like his now infamous “$420 buyout tweet,” where he said on Twitter he was considering taking Tesla private for $420 a share. Also dumb. But it doesn’t make him a drug addict.
Kupperman, however, cites this behavior to support his substance-abuse allegations. “I don’t think it is over the top to allude to drug use, when he himself has alluded to drug use,” says Kupperman. “I am a businessman. I don’t tweet about drugs. I don’t even know the latest drug lingo.” Yes, but stating someone can’t stay sober is a different kind of charge. Kupperman seems to hold his ground. “Put it all together, where there is smoke there is usually fire.”
Next, in a daily email newsletter that value investor Whitney Tilson sends to fans and investors, he’s published reader emails saying Musk has serious substance-abuse issues. One recently suggested Musk wouldn’t be able to make a court appearance sober, because he can’t avoid drugs long enough to do it. This, too, seems so over the top as to be a clear sign of hubris among Tesla skeptics. (Tilson says he has no short position.)
Tilson responds that he’s free to circulate reader email without endorsing it. But this is reminiscent of one of the worst mistakes ever made by the media, when they enabled Joseph McCarthy’s “Red Scare” by repeating his unsubstantiated claims of collusion with Communists, destroying lots of careers in government and Hollywood.
Tilson also goes further, saying on his own that Musk should go to rehab. This seems unfair — without any hard evidence of substance abuse. But it’s another useful sign of hubris among the Tesla bears.
“He’s acknowledged being a little loopy on Ambien. He’s smoked pot on video, and he is extremely erratic,” responds Tilson. “Don’t show up on national TV smoking weed. That’s what I would tell you if you didn’t want people talking about this. Nobody is being unfair to Elon Musk here, given his behavior.”
In fairness to Tilson, in other emails he has described Musk as “an incredible entrepreneur with a remarkable track record” partly because he has “forced one of the world’s largest industries to invest heavily in electric cars — and humanity will be the better for it.”
Tilson has been on the losing side of Tesla before. In 2014, he called his bet against Tesla “one of the biggest mistakes long or short of my investment career.”
Tesla skeptics are relying on “spidey sense” for insights
I’ve followed Tilson’s work for over 10 years, and I have a lot of respect for him. He’s a sharp thinker and a good writer. His take-down of Netflix NFLX, -0.51% several years ago was an epic piece of investment research. It, too, turned out to be wrong. But that didn’t detract from the thoroughness of the work. And to Tilson’s credit, he recognized this in time and went long Netflix for a decent profit.
Because Tilson is such a bright guy, it caught my attention recently when he cited his “spidey sense” as a source of insight on why Tesla stock is doomed to close the year below $100.
What’s next, a Ouija board?
Tilson says intuition complements his fundamental analysis and original research. “When all three line up, that’s when I’ve made the most money.” Fair enough. George Soros has his back twinge, which he says told him when to get out of positions. But was “spidey sense” the reason Tilson recently published a basic research error, yet another sign of hubris?
Tilson recently wrote that virtually all sell-side analysts are bullish on Tesla. This would be terrible news for Tesla longs. A uniformly bullish sell-side opinion is faint praise for a stock — as anyone who lived through the late 1990s tech bubble may recall. It’s an ominous contrarian indicator.
The problem is, it’s untrue. More analysts have sell ratings than buy ratings on Tesla. To his credit, Tilson promptly caught this error and corrected it. And we all make mistakes, including myself. But for a bright Harvard Business School-trained investor to make such a basic error with such an easily verifiable point — while relying on his spidey sense — that seems like yet another sign of hubris.
Key takeaways
• People deserve to be treated fairly and responsibly — even CEOs like Musk — especially in the era of unruly Twitter mobs.
• Bright analysts like Tilson and Kupperman should push themselves to do their best work because this helps assure that the great stock-market capital-raising machine funds the most deserving entrepreneurs.
Anything short of this is a waste of good talent. “I think there’s a bit of irrationality coming from the short side,” says Shawn Kim, an automotive analyst at Gabelli Funds who follows Tesla even though Gabelli does not have a position.
But given how smart these two Tesla bears are, it’s also a sign of hubris and overconfidence. I’ll take it as a bullish signal on Tesla.
Tesla declined to comment for this article.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested TSLA in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School in the Knight-Bagehot program.
