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Sep 20, 2016

S3 BLACKLIGHT: Tesla & SolarCity Shorts are Down over $300 million

Short sellers in both Tesla Motors Inc. (TSLA US) and SolarCity Corp (SCTY US) are hitting their respective rev limiters as recalls continue hitting both securities in size. There have been 1.8 million shares, worth $368 million, of TSLA and over 4.9 million shares, worth $88 million, of SCTY shares recalled since last Thursday. Long holders who have been lending their shares are recalling their stock in advance of the merger being finalized. Short interest for both stocks is down in the 3rd quarter, with TSLA down $937 million, or 14%, to $5.6 billion and SCTY down $148 million, or 23%, to $505 million.

In the 90 days since the merger was announced lenders generated approximately $209 million of income lending TSLA (13.7% average fee) and $78 million of income lending SCTY (59.3% average fee). Short sellers on the other hand, lost approximately $63 million shorting TSLA (up 4.1% since 6/22) but made $23 million shorting SCTY (down 17.2% since 6/22). In aggregate, long shareholders who lent their shares did very well since the merger was announced; netting $327 million of stock loan income and mark to market P\L while short sellers are down $327 million in short borrow costs and mark to market P\L.

But the merger is far from over, there are four pending lawsuits filed against Tesla which will hold up the deal at least until after initial hearings take place on October 18th. Short sellers remain steadfast in their conviction and foresee long term negative consequences if and when this merger is completed. At Institutional Investor’s Delivering Alpha Conference Jim Chanos of Kynikos Associates stated that when calculating Tesla’s stand-alone Z-score, a predictor of bankruptcy, it is “slightly above the red-line”, but is “well under the red-line by buying SolarCity” due to a predicted “cash burn of $1 billion a quarter” and “constant need to access capital markets”.

The S3 Crowding Indicator, a measure of the magnitude of real-time shorting activity relative to market cap and float, has been spiking for the last week for both securities. It will take a little longer than the 2.5 second 0-60 time of Tesla’s Model S for short sellers to cash in on their anticipated Alpha, but after enduring an expensive 90 days it looks like they are in it for the long haul.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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