The short squeeze now going on in shares of Tesla (NASDAQ: TSLA) is getting so crazy it is now one for the history books. Yesterday the stock went up 19% in a single day after having gone straight up now for weeks ever since its big October earnings gap up. When the stock then made a new high in December it forced those short the stock to cover and the higher it went the more covering they have had to do. This fuels buying in the stock.
Now the move Monday was in part inspired by an analyst at ARK Investment management who decided to upgrade his price forecast on the stock to $15,000 a share by 2014. Now I consider such a statement absurd as it would make Tesla into a two trillion dollar company when the largest company in the world now is Microsoft with a $987 billion market cap, but it certainly fueled buying from people who heard it and shorts who decided they had to cover for good. Take a look at the chart.
When shorts cover a position they buy shares. What a short seller does is borrow stock from their broker to sell what they do not own. They then must buy to close out their position. If the stock falls and they buy at a lower level than what they sold shares short at they make a profit but if the stock goes up they lose money and the higher up it goes the worse it gets for them.
The thing about Tesla is that in this bull market it has been the single most shorted stock in terms of the worth of the shares – the market capitalization. Ihor Dusaniwsky, Managing Director of Predictive Analytics at S3 Partners put out this note on the short activity in Tesla last week:
“Tesla short interest is $14.28 billion; 24.58 million shares shorted; 18.37% of its float; with a stock borrow fee of 0.30%. Short sellers have decreased their exposure by -1.78 million shares, -6.74%, over the last 30 days which equates to -$1.03 billion worth of short covering. There was active short covering ahead of Tesla’s earnings report yesterday, with 544 thousand shares covered, worth -$316 million, over the last week.”
Tesla has been a controversial stock with the activities of Elon Musk even attracting SEC attention in past years and short sellers becoming very vocal against him and the stock. At the same time he has created a personality cult of people who worship Musk and are fanboys of the stock, many of whom probably don’t even understand things like short selling and market capitalization. Past history though shows that stocks that become historic short covering stories one day stall out and collapse. But those short sellers waiting for that day have a very tough time of it and get killed before it happens or are forced to close their positions at the top.
With the gyrations in the stock market and news of the coronavirus this Tesla story has been overshadowed by those swings and events, but it is a big story. And it is happening now. As for the stock market I gave my updated views of the markets with Ike Iossif in a podcast you can find here.