Tesla short-covering rally subsides, some investors may re-load

NEW YORK Tue May 14, 2013 5:57pm EDT

NEW YORK May 14 (Reuters) - The wave of short-covering that drove shares of electric car maker Tesla Motors to huge gains last week appears to have subsided, but there are still plenty of investors willing to bet against the stock.

Tesla shares hit a peak of $97.12 on Tuesday, before falling back, and are up nearly 50 percent since last Wednesday, just before the company blew past Wall Street estimates to post its first-ever quarterly profit.

The massive rally has come on increased volume and as several analysts rushed to raise their price targets. At Tuesday's closing price of $83.24 a share, Tesla is now more overvalued than 98 percent of other U.S. stocks, based on a Thomson Reuters Starmine screen of stock valuations. It was just a month ago that Tesla shares traded in the low $40s.

In the last week, the price target of analysts on average has risen to $70 from $50 a share.

The stock won a stamp of approval on Tuesday from Morgan Stanley, which kept its "overweight" rating on Tesla and boosted its target price on the stock to $103 from $47. Morgan Stanley owns more than 1 percent of the stock and has done investment-banking work for the company.

On the other hand, those confident the stock is way overvalued are short about 17 percent of Tesla shares - even at an annualized borrowing cost of about 30 percent, or 100 times the borrowing cost of an average stock, according to Markit.

"Some of the short sellers have covered, there are plenty more to cover and they've got a choice now: Do they stay in, thinking it can't sustain the spike, or do they just get out and take a huge loss right now?" said William Duff Gordon, research director at Markit in London.

Those who are looking to short have some evidence on their side - with a price-to-earnings ratio above 227, Tesla is nearly 30 times overvalued compared with other automakers, including General Motors, Ford and Porsche, according to Thomson Reuters data.

SHORTS RELOADING?

Excitement over the company's first-ever profit helped fuel a sharp rally in the stock that caught short-sellers betting on declines. Trading volume spiked to more than 28 million shares on Thursday, a record, and on Tuesday to more than 37 million, again a record.

Some of the recent gains have come from short sellers covering their bearish bets. Shares outstanding held for short bets fell from more than 20 percent before Tesla reported earnings to 17 percent on Monday, according to Markit data.

"It appears the shorts are still around in the sense of short-term players," said Frank Davis, director of sales and trading at LEK Securities in New York. "The institutional players, though, less of those are resetting (their short bet) at the higher levels."

After three days of the stock's opening near its lows and closing near the day's highs, shares ended down 5.2 percent on Tuesday, which suggests the short-covering rally had ended.

Recent activity in Tesla suggests it has become a momentum crowd stock, similar to Netflix or, in years past, Green Mountain Coffee Roasters. These types of companies generally come out of innovative industries, or sometimes fads, and boast increasing revenue. The stocks tend to rise sharply on increasing trading volume, and as a result, attract bets against them.

"It's a precarious situation because the price has spiked so much, but people might be patient and stay there," said Gordon of Markit.

Two of every three Tesla shares available for loan are still being borrowed, indicating there are many betting the recent rally will reverse and the stock will break down.

"Many industry players and market observers have been waiting for Tesla to fail since it went public in the summer of 2010," said the Morgan Stanley note.

"They may need to be waiting for a very long time."

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