Shares of Tesla Motors (TSLA) are down sharply since peaking in late January.
Even so, the stock is still massively overvalued (1,226 Price-to-earnings ratio!), and even the forward-looking metrics are very high, with forward P/E at 175 and the forward PEG ratio at 4.64.
There are also reasons to be concerned about the main source of the company's profits, selling carbon credits to other automakers. With every other automaker making strides in the electric-vehicle game, and lots of new players competing for a foothold in the EV space, the not-too-distant future seems likely to have both less demand for those credits, AND a lot more supply.
So with many reasons to think the stock price is too high, and a potential break in the relentless upward momentum that has pushed the stock higher, why not short it, or at least buy some cheap puts?
The reason TSLA doesn't trade like other stocks is because Tesla shareholders aren't like other shareholders.
What I'm about to say doesn't apply to all TSLA holders of course, but there is a contingent of superfans of CEO Elon Musk, the company, it's cars and the stock that don't tolerate criticism of any of the above.
It's this what makes TSLA different from other stocks. There are plenty of people on social media trying to spread the good news about the stock, and they're not shy about telling critics how wrong they are.
Musk himself famously sold short shorts to mock short sellers.
While this sort of behavior is somewhat foreign to investing, it isn't unheard of... Let's go through a quick checklist:
- The group is focused on a living leader and displays a seemingly overzealous loyalty. Check
- The group seems obsessed with making money. Check
- The group is focused on bringing in new members. Check
- Dissent and doubt are strongly discouraged and sometimes punished. Check
- The group encourages internal socialization and relationships. Check
- The leader isn't accountable to authorities. Check
This doesn't read like a typical investor checklist, because that's not what it is. This is a list of characteristics associated with cults.
Economics and finance are based on an idea of markets full of rational decision makers. When you combine the huge gains that many Tesla investors are currently sitting on with a faith-based approach to decision making, you've got a lot of shareholders who not only won't sell at any price, but also, see any dip as a fresh buying opportunity.
Given that markets have an upward bias (remember Adam Smith's invisible hand?). Investors willing to bet against a stock have to be extra sure they have all the facts on their side. Even then, the success of the trade depends on the rest of the market acting rationally.
And that's why I'm not willing to bet against Tesla.
It's not that I don't think the stock is too high. I do.
It's that there are too many investors who don't believe the stock can ever be too high.
