Tesla's highly anticipated Model 3 delivery report has traders bracing for the worst
- Traders are loading up on short bets ahead of Tesla's fourth-quarter delivery report, which is expected this week.
- There's some concern that Tesla will fall short of forecasts, which helps explain the rise in hedging activity.
Tesla is set to report its fourth-quarter deliveries this week, and equity investors are taking no chances.
They've ratcheted up short interest - a measure of bets a stock will fall - by $6 million, or 22%, over the past three months leading up to the announcement, according to data compiled by financial analytics firm S3 Partners.
The increase in bearish wagers likely corresponds with mounting concerns over Tesla's ability to hit delivery targets. It's been an ongoing worry for Wall Street analysts like Jeffrey Osborne at Cowen, who's had a long-running "underperform" rating on the stock.
The biggest source of anxiety for Osborne is Tesla's Model 3 sedan, for which he forecasts 2,250 fourth-quarter deliveries, a far cry from the consensus forecast of 4,000 to 5,000 vehicles.
And while the rest of Wall Street isn't quite as bearish as Osborne, it's possible that the investment community at large is considering his overall bear case on Tesla. He argues the company will be negatively affected by increased competition in the electric vehicle space in 2018 and 2019, and forecasts that it'll continue to quickly burn through cash.
Another explanation for the surge in short interest is one recently floated by S3 Partners - that traders are using short bets on the market's best-performing stocks to hedge against broader weakness. The wisdom behind using stocks like Tesla as a proxy is that the biggest, most influential stocks dictate the overall direction of the market.
However, during a recent two-week period that saw Tesla's stock drop more than 9%, short interest continued to climb. Since hedges tend to decline during periods of weakness, the resilience seen in shorts suggests that there were other bearish forces in play - likely trepidation around the delivery report.Short sellers have caught the eye of Elon Musk in recent months. Tesla's CEO and founder called them "jerks who want us to die" in a Rolling Stone profile and described their behavior as "hurtful." He's also been an outspoken critic on Twitter.
With all of this said, it's important to note that shorting Tesla has been an exercise in futility for quite some time, likely much to the pleasure of Musk. But that doesn't mean the increase in short interest is doomed to fail. It's entirely possible that Tesla will see a swift short-term pullback that will result in profits for these traders. Stay tuned to find out.
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