There is a chance that shares of Teladoc Health Inc. (NYSE: TDOC) can go into a stock rocket launch much like we have seen shares of Tesla (NASDAQ: TSLA) do in the past few days. Take a look at the chart of Tesla to see what its stock has done. It’s completely crazy now as the stock was up over 18% on Monday and then went up over 19% at one point Tuesday before it faded a bit on the close. Volatility premiums for TSLA call and put options exploded in the options market.
I made a post about Tesla before the market opened up on Tuesday to note that the action in it amounts to a historic short covering event. Much of the action in this stock was driven by short covering, because it is the number one stock in the entire market now – maybe in history even – in terms of the value of the number of shares actually shorted. But now this week the momentum is attracting small traders who don’t even understand concepts like short covering who are simply chasing the stock action. The popular online broker for instance Robinhood keeps a running total every day of the number of people who own a stock and that number for Tesla has grown in the past week to show us that smaller stock market traders are indeed trying to chase the action.
At this point that is hard to do and get a good entry point. Moves like this typically suddenly end one day and generate an epic reversal top and there is no way to predict ahead of time the day that will happen. My thinking is instead of trying to buy Tesla now to ask myself what is the next stock with a giant short position that could experience a big short covering fueled move up like Tesla has done?
To tackle that question I went and looked at several lists of stocks with giant short positions in size of the value of the short position and the number of days it would take to cover the position. To figure that out you simply total the number of shares short and divide that figure by the daily average in the stock. The data is delayed, but with Tesla on January 15 the days to cover was 2.4.
Now stocks with giant short positions really are not good for long-term investments. People short these stocks because they believe there is something fundamentally wrong with the company. They may have massive debt loads that seem unsustainable or appear to be playing accounting games to make their earnings seem to be better than they really are. I do not believe Tesla is a good long-term investment no matter what it has done this month.
A company that also has a giant short position that could experience short covering is Teladoc Health Inc. (NYSE: TDOC). As of January 15 the total value of the shares short for TDOC is $2.3 billion, which represents a staggering 32.9% of its entire trading float for a days to cover of 20.1. Take a look at the chart.
A lot of people decided to bet against TDOC shares last year. David Trainer, a Forbes author said to avoid the stock, because of an accounting change Teladoc Health made with its accounting. “Companies that tie executive compensation to Adjusted EBITDA – a metric that is easy to manipulate and has no clear link to shareholder value,” he wrote. He noted that the company reported huge growth in EBITDA earnings while “net operating profit after tax (NOPAT) continues to decline, from -$64 million in 2018 to -$74 million TTM. The disconnect largely comes from TDOC excluding real expenses like stock compensation expense (which increased by $17 million year-over-year in 2019) from Adjusted EBITDA. By excluding real expenses, TDOC maintains the illusion of profitability.”
Now Trainer is a smart guy and makes a lot of good arguments on why TDOC is not a good long-term investment, but they mean nothing to momentum traders and shorts if the stock goes up enough to force them to cover. We are in a moment now in which the odds of a coming interest rate cut this year are 80% with the Treasury bond yield curve inverted again. Some traders think that means a green light to buy stocks ahead of the promise of future Federal Reserve action so they are now buying anything that moves. This will be an interesting situation to keep an eye on and see how it develops. I decided to take a flyer on the stock and buy a small short-term trading position to see if it can go up from from here with a short covering surge. It reports earnings around February 26, 2020.
-Mike
