Squeezed Tesla Bears Buying $276 Million Hand Musk 146% Advance

Bears blindsided by Tesla Motors Inc. (TSLA) have been forced to buy $276 million worth of the automaker's shares, pushing the company toward the biggest rally in the Russell 1000 Index (RIY) this year.

Tesla's short interest, a measure of shares borrowed and sold on speculation they will fall, shrunk by 17 percent in the five days through May 13, after earnings that beat analyst forecasts and Consumer Reports gave the Model S sedan a top rating, data compiled by London-based Markit show. More than $3 billion in market value has been created as the stock jumped 50 percent to $83.24 since May 7.

The gains illustrate what's possible when negative sentiment builds in a company and management is able to avoid disappointment. Short interest in Tesla was 40 percent of available shares as recently as April 19, more than 11 times the average of companies in the Russell 1000. While bears say the news on Elon Musk's company will one day turn sour, for those who bet against it, last week was a shock.

"I'm watching this with amazement," Mark Travis, chief executive officer of Jacksonville Beach, Florida-based Intrepid Capital Management Inc., which manages $1.4 billion and covered its Tesla short around $40, said in a phone interview. "I've had a very hard time being short here in the last six to nine months. There were a few things that worked but a lot that haven't."

Stock Slips

The stock retreated from its record high yesterday, declining 5.2 percent for the first drop in five days. The Palo Alto, California-based automaker has rallied 177 percent over the last 12 months, pushing its price to about 73 times analysts' forecasts for its 2014 profit, compared with a multiple of 13.8 for the Russell 1000, according to data compiled by Bloomberg. The shares trade at more than 550 times projections for earnings this year, the data show.

Shanna Hendriks, a spokeswoman for Tesla, said the company isn't commenting on trading in the stock.

About 19.7 million shares were sold short in Tesla as of May 13, or 17 percent of the company's outstanding stock, according to Markit data. That's down 4 million from May 7, the day before the automaker reported its first profit. Buying that many shares at the market's average of $69.05 over the period would cost a total of $276 million.

"That number is a fair approximation of the amount of short covering we've seen recently," David Riehl, a New York-based research analyst with Markit, wrote in an e-mail. "Tesla has been a crowded short since its first day of trading. Like many recent IPOs, the supply of shares made available for borrow has been relatively scarce. This has kept the cost to borrow extremely high."

146 Percent

Tesla's stock is up 146 percent this year, the second-most in the Russell 1000 behind Netflix Inc. (NFLX) The equity gauge has rallied 16 percent this year to an all-time high as better-than-estimated corporate profits and the Federal Reserve's third round of bond buying boost economic growth.

Tesla is trading 22 percent higher than the average analyst price estimate of $68.20, according to data compiled by Bloomberg, the eighth-highest among companies in the Russell 1000. While 253 members of the index trade above their price projections, the average stock is 4.2 percent lower than analysts forecast.

"Most traders trying to catch the top are not having much fun," Sam Ginzburg, a partner and head of capital markets at First New York Securities LLC, a New York-based proprietary trading firm, said in an interview. "I can honestly tell you that when my father, who has never bought a single stock in his life, called and asked if he should buy it below $70, I was shocked. Intuitively I thought that would be the top for the shares. He was obviously right and the son was wrong."

Borrowing Costs

Bears aren't giving up. The cost of borrowing the shares, a gauge of demand for short selling, is among the highest, according to Markit.

The company reported last week that first-quarter net income totaled $11.2 million, compared with a loss of $89.9 million a year earlier. Excluding some items, the profit was 12 cents a share, compared with a year-earlier loss of 76 cents.

Revenue surged to $561.8 million from $30.2 million in the year-earlier quarter, which was before Model S production began. Sales of so-called California zero-emission vehicle credits and U.S. fuel economy and greenhouse gas credits to automakers Tesla didn't name generated $85 million, or 15 percent of revenue, in the quarter. Revenue from ZEV credit sales will drop in the second and third quarters and there may be none in the fourth quarter, Musk said on a conference call.

Sales Target

If Tesla achieves its 2013 target of 21,000 Model S deliveries, that would surpass combined global volume for Italian luxury marques Ferrari SpA, Automobili Lamborghini SpA and Maserati SpA, which together sold 15,701 cars in 2012.

"As the stock goes even higher, the short sellers are putting up more cash, saying, 'This thing has to go down. There's not enough demand for high-priced electric cars'," Walter "Bucky" Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama, said in a phone interview. "At some point, it hit the breaking point. There's a buying panic because they want to get out of the position before it goes higher."

Tesla's short squeeze came even as levels of bearishness are falling market wide. The proportion of Standard & Poor's 500 Index (SPX) shares available for trading, or float, that was sold short on April 30 has fallen to 3.65 percent from 4.1 percent six months ago, according to data compiled by U.S. exchanges and Bloomberg. A Goldman Sachs Group Inc. basket of the 50 most-shorted American stocks has outperformed the benchmark gauge this year, rallying 24 percent compared with 16 percent for the S&P 500.

Hedge Funds

A gauge of hedge-fund bullishness, which measures how much they're betting on rising shares, rose to 50.4 last week from 49.5 on May 1, according to a survey by New York-based International Strategy & Investment Group. The high was 62 in May 2007. The ratio of bullish to bearish bets rose above 50 in January for the first time since July 2011. A reading above 50 suggests a bias toward long bets relative to normal positioning. AG, which sold more than 140,000 vehicles globally last year.

Equity hedge funds have been too bearish on U.S. stocks since the bull market began in March 2009, with returns trailing stock benchmarks in almost every month. The HFRX Equity Index has gained 15 percent over that 50-month stretch, compared with the 144 percent advance in the S&P 500.

"When you get to short interest levels like this, it's because the crowd mentality sets in," Tim Hartzell, who helps manage about $425 million including Tesla shares as chief investment officer at Sequent Asset Management in Houston, said in a phone interview. "The herd thinks someone knows something and people pile into the same short, but they end up getting squeezed out when the earnings come through and the story turns positive."