MorningWord 6/19/13: $TSLA Shorts Have Been Screaming In Silence, Will They Ever Be Heard?

by Dan June 19, 2013 7:11 am • Commentary

MorningWord 6/19/13:  And there it is, can you hear it?? It starts out pretty faint, but by the end of the day it could be a full blown scream. TSLA released a statement calling or a partial recall of their Model S for cars made between May 10th, 2013 and June 8th 2013.

As I write at 7am, a search of Twitter yields only 2 journalists tweeting about it, but I suspect with the stock up 200% ytd and tons of non-belivers in the electric car story, or just the valuation of a mania stock like TSLA, this is likely only the start:

Last night on CNBC’s Fast Money I was asked to comment on TSLA’s intra-day reversal (originally down 2% to up 1%) and I suggested that CEO Elon Musk could do no wrong at the moment and no matter what comes out of his mouth, the stock apparently goes up.  I ended the comment by sarcastically saying “Buy It”.  To be clear I am not a long term buyer of the stock HERE, the news has been just too good, the momentum too strong in a time where short interest is declining rapidly (Bloomberg’s latest reading shows 24%, down from 38% just a couple of months ago). Something has to give, the company’s recent capital raise and acknowledgement of their first quarterly profit in their corporate history has had shorts screaming in silence, but for those of us who have witnessed stock mania’s before we know that there will be ebbs and flows of the story, and this morning’s acknowledgement could just be the start of an ebb, but I assure you there will be more flows.

I expect pundits to start asking questions like at what point was management aware of the defect, was it before or after they announced a billion dollar capital raise on May 15th (read release here)?  Was this the reason why CEO Musk bought in on the deal to the tune of $100 million to soften the potential blow??  I am sure there are more to come but with such a controversial story, the dwindling shorts who have not been heard are likely to try to make themselves heard on what appears to be the first stumbling block since the stock went on the latest leg of its parabolic run since March.

My View, this story is going to continue to have legs, recalls are part of the business of making cars, and for any investor who thought that TSLA would somehow be immune is fooling themselves.  The company has stated that they will make about 20k cars this year so the period in question of the recall is probably around 1500 cars.  Will these early adopters be annoyed that they lose their toy for a few days, probably, but better now then never while they are still basking in its glory.

Investors who just bought into the secondary last month (10% lower than last nights close) are not buying for the here and now.  They believe that Musk is in the first inning of a game that could go into extra-innings.  Since the deal, I have suggested that many long term investors would likely be OK with a dip in the stock, shake out some weak hands and have a classically closely held shareholder base that is control of the stock rather than “fast money” longs and shorts so to speak.

We will continue to look for trading opportunities in the stock through the options market as we did last month with a calendar call spread (here), using the high implied volatility to finance owning options for periods where we can identify potential catalysts.  But in the meantime, the shorts shots may be heard from time to time, although playing for the big one at this stage of the game is likely to be a tad premature, I suspect to see buyers on weakness in this name for some time.