Investors were giddy after Tesla reported third-quarter earnings late last week. On Thursday, they bid up the stock by 22 percent; it closed at $260.48. They tacked on an additional $8.71, or 3.34 percent, on Friday, when the stock closed at $269.19.
Investors, including Elon Musk, cheered that auto profit margins came in above the previous year’s level and significantly above the previous quarter’s. “This will give bulls hope that Tesla passed the nadir on numbers,” conceded analysts at UBS, which has a sell recommendation on the stock and a 12-month price target of $197. They also noted that the Cybertruck hit a positive gross margin in the quarter.
Few hedge funds, however, seem to have benefited from this surge. None counted the electric-carmaker among their top-ten holdings as of the end of the second quarter, according to regulatory filings.
And though macro giant Caxton Associates had established a new position in the second quarter that made Tesla the firm’s sixth-largest U.S. common stock long position, it also had a huge put option position to hedge that bet, according to its most recent 13F filing.
Tesla was also the ninth-largest long in D.E. Shaw’s large U.S. stock portfolio, according to the quarterly filing.
But several smaller hedge funds, including 683 Capital Management and Hiddenite Capital, reported holding sizable put option positions at the end of the second quarter. It’s unclear whether they still had this trade on last week.
Hedge funds are generally reluctant to disclose their specific short positions. But at least one exception is Seligman Tech Spectrum Fund, which regularly identifies its shorts to clients in its communications. Institutional Investor reported late last December that manager Paul Wick, who had already been bearish on Tesla, told clients it was a good time to bet against the stock even though it had surged by 140 percent in 2023.
“Tesla has missed numbers all year, and a stale lineup of cars looks unlikely to change things any time soon,” the hedge fund manager said in the November 27, 2023, client letter. “At the same time, the company’s valuation remains stratospherically high; as numbers inevitably get cut, we see [the] stock as likely to fall significantly.”
Tesla was the fourth-biggest contributor to the return on Seligman’s tech-oriented hedge fund’s short book in 2022, when the hedge fund gained 1.82 percent for the year as the Nasdaq Composite lost about 35 percent.
Indeed, the stock dropped about 25 percent in the first half of this year. However, after bottoming in late April, the stock jumped nearly 40 percent by the end of the second quarter. This led Wick to concede in his second-quarter letter, dated July 31 and obtained by II at the time, that Tesla was his “most painful short over the past three months.” He asserted that it was “difficult to understand” why the stock bounced back so well after selling off sharply, citing “weak sales, declining margins, ongoing cash burn and inventory build, high valuation, and a stale product lineup.”
Wick asked in the letter: “Is it Elon’s promise of robo-taxis (now delayed from the promised date of August 8th)? Is it retail investors ‘bargain hunting’? Is it Elon’s promise of humanoid robots that will ‘make Tesla worth trillions’? Or is it manipulative call option purchases by Elon and his allies?”
Wick stressed that the “shocking rebound” in the stock felt very much at odds with the company’s fundamentals, which he said were “clearly quite weak, with the exception of the energy storage business.” He reminded his clients that Tesla was under regulatory scrutiny from a number of federal agencies, including the Department of Justice, the National Highway Traffic Safety Administration, and the Securities and Exchange Commission, and asserted that the company’s Cybertruck “has been a fiasco, with multiple recalls.”
Among other things, Wick pointed out “... We know that Tesla’s market share of EVs in the U.S. has fallen below 50 percent for the first time. Bloomberg reports that Tesla sales in California have trended lower for three straight quarters, and we know that numerous senior executives have quit the company or been fired in the layoffs of the past six months.”
He acknowledged that his Tesla short had cost the fund nearly 2 percent since the stock’s low, but added: “We are optimistic that the magic can’t last in the face of such dire fundamentals. Fortunately, as we go to press with this letter, Tesla has posted disappointing June-quarter earnings, giving us a respite from its recent rally.”
Until last week.
Wick declined to comment on the stock’s recent movement or to confirm that he still has a short position in Tesla. Despite the recent euphoria, automotive revenue rose only 2 percent in the third quarter compared with a year ago, after two straight quarters of declines.
In fact, even Tesla chief financial officer Vaibhav Taneja conceded on the company’s conference call that it will be “challenging” for the company to maintain current profit margins.