(Bloomberg) — Hedge funds rushed into short positions against Tesla Inc. (TSLA) just before the electric-vehicle maker released a series of data that triggered a sharp rise in its stock price.
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About 18% of the more than 500 hedge funds tracked by data provider Hazeltree had an aggregate short position in Tesla at the end of June, the highest percentage in more than a year, according to figures shared with Bloomberg. That compares with just under 15% at the end of March.
Those contrarian bets are now threatening to cause losses for the hedge funds that back them. Tesla’s latest vehicle sales results, released on July 2, showed second-quarter deliveries that beat analysts’ average estimates, even though sales were down. Investors pounced on the news, sending the company’s shares to their highest level in six months. Since the beginning of June, Tesla’s stock price has climbed about 40%.
Tesla is expected to see its profit margins improve, helped by lower production and raw material costs, according to Seth Goldstein of Morningstar Inc., one of three leading analysts covering the stock in a Bloomberg ranking that tracks price recommendations.
The company is expected to “return to earnings growth” next year, he said in a note to clients. But how Tesla handles the market’s growing interest in affordable electric vehicles will be key, he added.
This development fuels a lingering sense of uncertainty about how to address the EV market as a whole, amid conflicting dynamics. The industry, a key player in the global race to achieve carbon neutrality by 2050, benefits from generous tax credits. Yet it also faces significant hurdles in the form of tariff wars and even identity politics, with some consumers dismissing EVs as a form of “woke” transportation.
In the United States, Donald Trump has said that if he is re-elected president after the November election, he would repeal existing laws in favor of battery-powered vehicles, calling them “crazy.” That said, Trump is a “big fan” of Tesla’s Cybertruck, according to Elon Musk, the CEO of the electric vehicle giant.
Meanwhile, the list of internal disruptions at Tesla is long. In April, Elon Musk told employees to prepare for major job cuts, particularly in sales positions. And the Cybertruck, Tesla’s first new consumer model in years, has been slow to develop.
For that reason, some hedge fund managers have decided the stock is completely out of reach. Tesla is “very difficult for us to position,” said Fabio Pecce, chief investment officer at Ambienta, where he oversees $700 million, including running the Ambienta x Alpha hedge fund.
Fundamentally, it’s unclear whether investors are dealing with “a top-tier company with a great management team” or “a struggling franchise with poor corporate governance,” he said.
However, “if Trump wins, it will be really positive” for Tesla, although “it will obviously not be a good thing for electric vehicles and renewables in general,” he said. Indeed, Trump is expected to impose “massive tariffs on Chinese players,” which would be “good” for Tesla, Pecce said.
Investors ended 2023 saying they were likely to pull back further from green stocks in general, and electric vehicles in particular, according to a Bloomberg Markets Live Pulse survey. Nearly two-thirds of the 620 respondents said they plan to stay away from the electric vehicle sector, and nearly 60% expect the iShares Global Clean Energy exchange-traded fund to extend its slide in 2024. The ETF has lost 13% year to date after falling more than 20% in 2023.
The Bloomberg Electric Vehicle Price Return Index, which includes BYD Co., Tesla and Rivian (RIVN) Automotive Inc., has fallen about 22% since the start of 2024. At the same time, the metals and minerals needed to produce batteries are at the mercy of wildly volatile commodity markets, with speculators regularly trying to make a quick buck on swings in supply and demand. The price volatility means some battery makers are having to adapt to a market in which their profit margins are squeezed.
Against this backdrop, more traditional automakers are under pressure from shareholders to slow their investment spending on electric vehicles, as Porsche AG recently did. Polestar Automotive Holding UK Plc (PSNY), a maker of premium electric vehicles, has lost nearly 95% of its value since splitting from Volvo Car AB two years ago. Fisker Inc., another maker of luxury electric vehicles, has seen its value disappear starting last year and has since filed for bankruptcy protection.
Soren Aandahl, founder and chief investment officer of Texas-based Blue Orca Capital, said “the valuations in the electric vehicle space are so beat up” that he now avoids shorting the sector. It’s no longer an obvious contrarian bet, because such bets tend to work best if investors get in “when things are a little bit higher,” he said. But at that point, “a lot of the air has already been taken out of the balloon.”
But Eirik Hogner, deputy portfolio manager at the $2.7 billion hedge fund Clean Energy Transition, believes the EV industry could face further challenges. There are still “far too many” startups that remain “undersized” and whose gross margins are simply “too low,” he said. As a result, the supply-demand dynamics of the EV market “are still very negative.”
“Ultimately, I think we need to see more bankruptcies” before the market starts to look healthier, Hogner said.
—With assistance from Craig Trudell.
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