Tesla stock zooms, squeezing ‘short sellers’

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Shares of electric-car upstart Tesla Motors Inc. continued their hot streak on Monday, hitting a record high of $33.40.

The Palo Alto company’s stock has zoomed 53% since Nov. 3, boosted by a string of favorable news that now appears to be putting extreme heat on “short sellers” who had heavily bet that the shares would tumble.

Tesla stock had been dead money for most of the period after its initial public offering on June 28. The company went public at $17 a share that day and posted a first-day gain of 40% on June 29, when the shares closed at $23.89.

But after that the stock quickly fell to $15.80, then drifted between $18 and $22 for the rest of summer and into the fall.

After the initial excitement, many investors have figured the company would be unlikely to turn a profit before 2012, when it launches its Model S electric sedan. And before then giant rivals including General Motors, Nissan and Ford Motor will be in the market with their own electric cars.

Nonetheless, Tesla’s shares revived on Nov. 4, one day after Panasonic Corp., the biggest maker of rechargeable batteries, bought a $30-million stake in the firm, paying $21.15 a share. That was good for a 14% jump in the stock, to nearly $25.

On Nov. 9 the company reported a third-quarter loss that was smaller than Wall Street had expected. And on Nov. 10 the stock soared to $29.36 after analyst Himanshu Patel at JPMorgan Chase, one of Tesla’s IPO underwriters, reiterated his “buy” recommendation, saying the company was “at the vanguard of improving battery costs/durability.”

By that point the pain must have been getting intense for short sellers in Tesla stock: As of Oct. 29 there were 6.6 million Tesla shares shorted -- out of total float (the number of shares available for trading, meaning those that aren’t locked up by insiders or other major owners) of just 10.3 million shares, according to Bloomberg News calculations.

Tesla was by far the most-heavily shorted stock in the Russell 1,000 index at the end of October, according to market research firm Bespoke Investment Group.

In a short sale an investor borrows stock (usually from a brokerage’s inventory) and sells it in the open market. The bet is that the market price will dive, allowing the short seller to buy new shares at lower prices, use them to replace the borrowed shares, and pocket the difference between the sale price and the purchase price.

But if the shorted stock’s market price rises instead of falling, short sellers face mounting losses. Each uptick in the stock puts more pressure on the shorts to buy shares and close out their positions. That’s a classic “short squeeze”: As they rush in to buy they can push the stock even higher.

The latest blow to the shorts was a rumor on Friday that Ford was interested in buying Tesla. Even though Ford denied the rumor, Tesla rose 3.7% on Friday and another 7.8% on Monday, to $33.40.

A Tesla spokesperson didn’t respond to a request for comment on the stock’s wild run-up.

Tesla shares could continue to rise if the shorts are in fact exiting, but note that a short squeeze won’t last forever. And once many or most of the shorts have closed out their bets, the question is whether genuine investors would be willing to pay current prices for the shares.

-- Tom Petruno