Hedge funds piled into short bets against Tesla Inc. right before the electric vehicle maker revealed a series of numbers that sent its stock prices soaring.
About 18% of the more than 500 hedge funds tracked by data provider Hazeltree had an overall short position in Tesla at the end of June, the highest percentage in more than a year, according to figures shared with Bloomberg. This compares with just under 15% at the end of March.
These contrarian bets now threaten to saddle the hedge funds behind them with losses. Tesla’s latest auto sales results, released on July 2, revealed second-quarter shipment numbers that beat analysts’ average estimates, even as sales were down. Investors jumped on the news, sending the company’s shares to a six-month high. Since the beginning of June, Tesla’s stock price is now up about 40%.
Tesla is likely to see profit margins improve, helped by lower manufacturing and raw material costs, according to Seth Goldstein of Morningstar Inc., one of three top analysts covering the stock in a Bloomberg ranking that tracks recommendations. of prices.
The company is likely to “return to profit growth” next year, he said in a note to clients. But how Tesla handles the market’s growing focus on affordable electric cars will be key, he added.
The development is fueled by a lingering sense of uncertainty about how to handle the wider electric vehicle market amid a sea of conflicting dynamics. The industry – a linchpin in the global race to achieve net zero emissions by 2050 – benefits from generous tax credits. However, it is also facing significant obstacles in the form of tariff wars and even identity politics, with some consumers rejecting electric vehicles as a form of “smart” transport.
In the US, Donald Trump has said that if he becomes president again after the November election, he will undo existing laws supporting battery-powered vehicles, calling them “crazy”. That said, Trump is a “huge fan” of Tesla’s Cybertruck, according to Elon Musk, the EV giant’s chief executive.
Meanwhile, the list of internal disruptions at Tesla is long. In April, Musk told staff to prepare for major job cuts, with sales roles among those affected. And the Cybertruck, Tesla’s first new consumer model in years, has been slow to grow.
For this reason, some hedge fund managers have decided that the stock is completely off limits. Tesla is “very difficult for us to position,” said Fabio Pecce, chief investment officer at Ambienta, where he oversees $700 million, including managing the Ambienta x Alpha hedge fund.
Basically, it’s not clear whether investors are dealing with “a top company with a great management team” or if it’s “a challenged franchise with deficient corporate governance,” he said.
Still, “if Trump wins, it’s going to be really, really positive” for Tesla, though “obviously not amazing for EVs and renewables in general,” he said. That’s because Trump is expected to impose “massive tariffs on Chinese players,” which would be “beneficial” to Tesla, Pecce said.
Investors ended 2023 saying they are likely to pull further away from green stocks in general, and EVs in particular, according to a Bloomberg Markets Live Pulse survey. Nearly two-thirds of the 620 respondents said they planned to stay away from the EV sector, with nearly 60% expecting the iShares Global clean energy exchange-traded fund to extend its decline into 2024. The ETF lost 13% so far this year after falling more than 20% in 2023.
Bloomberg’s index of electric vehicle price returns, whose members include BYD Co., Tesla and Rivian Automotive Inc., is down about 22% so far in 2024. At the same time, the metals and minerals needed to make of batteries are at the mercy of extremely volatile commodity markets, with speculators regularly trying to make a quick buck from changes in supply and demand. Price volatility means some battery makers have to adapt to a market in which their profit margins have been squeezed badly.
Against this backdrop, more traditional automakers are finding themselves under pressure from shareholders to slow their capital spending on electric vehicles, with recent examples including Porsche AG. Polestar Automotive Holding UK Plc, a high-end maker of electric vehicles, has lost almost 95% of its value since it was spun off from Volvo Car AB two years ago. Fisker Inc., another luxury automaker, saw its value disappear starting last year and has since filed for Chapter 11 bankruptcy protection.
Soren Aandahl, founder and CIO of Texas-based Blue Orca Capital, said “valuations in the EV space are so battered” that he is now avoiding shorting the sector. It’s no longer an obvious contrarian bet because they tend to do better if investors get in “when things are a little higher,” he said. But at this point, “a lot of air is already out of the balloon.”
But Eirik Hogner, deputy portfolio manager at the $2.7 billion Clean Energy Transition hedge fund, suggests there could be more pain for the broader EV industry. There are still “far too many” startups that remain “under scale” and with gross margins that are simply “too low,” he said. As a result, the supply-demand dynamics of the EV market “is still very negative.”
“Ultimately, I think you have to see more bankruptcies” before the market starts to look healthier, Hogner said.