Tesla is “way overvalued”, but here’s why Gordon Reid won’t short it

These days, auto maker Tesla Inc (NASDAQ:TSLA Quote, Chart) has more than its share of doubters. But should you join the bandwagon and start shorting the stock? Never a good idea, says Gordon Reid of Goodreid Investment Counsel, especially when we’re talking about both a company and leader with such a devoted fan base.

The headlines keep coming for Tesla and its mercurial CEO, Elon Musk, the latest coming from brokerage firm Morgan Stanley which announced it is suspending coverage of Tesla, indicating that it may be playing a role in Tesla’s potential privatization, something Musk has suggested on a number of occasions.

Tesla’s share price dropped more than eleven per cent shortly after Musk’s now-infamous tweet on August 7 in which the CEO hinted that he might take Tesla private and that the funding for the move had already been secured. The stock overcame some of those losses during the last two days of trading, but even so, short-sellers of Tesla stock reportedly reaped more than $1 billion in rewards over the past two weeks — not bad for betting against the auto maker’s success. (All figures in US dollars.)

Musk himself has been vocal about the short-selling group, which together are said to hold more than one-quarter of Tesla’s shares on loan, approximately $11.2 billion worth. In a Rolling Stone interview last year, Musk also mused about taking Tesla private, saying that short-sellers are trying to sabotage his company and called them “jerks who want the company to die.”

Tesla doubters have more than their share of ammunition, however. Aside from its leader’s antics, the company has its own frailties, including regularly missed production numbers, a failure to make its car-making business profitable and now the ramping up of competition in the electric car market.

But short-selling is not for the faint of heart, says Reid, who claims that intangibles such as the impact of public sentiment will always make a dangerous practice.

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“At Goodreid, we don’t short stocks, but that doesn’t mean I don’t have an opinion on that kind of strategy,” says Reid, president and CEO of Goodreid, in conversation with BNN Bloomberg. “A great many people have shorted companies that eventually did very poorly and their thesis was validated but the stock had enough legs and enough momentum on the upside to cause those who shorted it to go broke,” he says. “That’s the gamble.”

Tesla supporters aren’t without their own justifications. While the company is presently losing money (at $3.06 per share, according to its latest quarter), it is nonetheless producing revenue of roughly $12-billion a year. And while other car companies may be on the verge of releasing (somewhat) affordable electric vehicle models, Tesla is the first to have done so with a modicum of success.

“I’m not a big fan of Tesla,” Goodreid says. “I certainly share [the] view that it’s way overvalued, but I think there’s less heart-pounding ways to make money in the market than trying to short a company that really has a cult following and that might cause you some real financial pain.”