Update on Tesla Motors

Tesla Motors

On this speculation, my fundamental thesis is still intact. However, I have also closed my position on this.

Paul Santos wrote an article detailing the precarious position of short sellers of Tesla Motors – it costs too much to initiate shorts, and those who had previously initiated a short are being forced out their positions simultaneously.

However, I drew an additional conclusion from the article: the shares short are rapidly decreasing. Once the majority of the shorts who are being forced to cover are driven out of the market, there will be a sudden drop in demand for shares. Simultaneously, Tesla has announced its biggest offering ever, which will flood the market with supply. Thus, I believe these two forces will combine to drop the share price in a correction.

I will likely buy on a pullback, as I believe the bull run has long legs. This offering will likely be soaked up by new long investors, and the tremendous injection of capital should allow Tesla to far exceed its previous expectations of sales.

I cannot justify holding my long position, as I believe that the pullback will cause the price to dip lower than its present position. I may be wrong, but I am willing to pay to see the effects of the end of the short covering. I believe that Tesla will see much higher prices than $92 in 2013 – the fervor surrounding this company is capable of doubling the shares yet again.

Update 3D Systems Corporation Position

I had written an article arguing we were now in an acceleration of the boom phase, and I am beginning to doubt my own investment thesis. I had been expecting analyst upgrades, based on the 250 basis point increase in the gross margins that 3D systems was generating. These have manifest, at both Canaccord and Janney Capital.

However, 3D Systems was recently downgraded by William Blair’s analyst Brian Drabb. Mr. Drabb had appeared very anxious about organic growth on the previous conference call, and it seems the CEO’s answers were unable to satisfy his concerns. This event is important because it indicates a possible shift in perception.

One analyst downgrading is not indicative of a whole market shift, but it does show a weakness in the bull thesis. What I am questioning now is whether we are really in a twilight phase – where both investors and analysts don’t truly believe in the underlying thesis anymore, but they continue to play the game. If this is true, we could be in for a catastrophic downward acceleration soon.

An addition weakness in the thesis comes in the form of a technical sign of a reversal. There was a doji on May 14, a downward hammer on May 15, and a down-day to confirm the hammer signal on May 16. This is a pretty strong reversal sign.

Technical Sign DDD May 2013

The stock is still quite popular with retail investors, who don’t seem to be doubting the thesis. But a second downgrade could mark the beginning of a sudden catastrophic downward acceleration (Stages 7 and 8 of the reflexive cycle, as outlined in my article), which increases the risk/reward ratio enough to make my position dangerous.

I hate to change my position so soon after arguing for a continuation of the boom phase, but if my investment thesis has been weakened, I have no business staying long the stock. Thus I have closed my position.

Market Position May 15, 2013

I have had some big successes in the market lately. The short yen position has been yielding truly incredible profits lately. Almost simultaneously, the long position in Tesla (TSLA) has nearly doubled. Nearly every day after the earnings announcement has given us a new breakout to higher prices. This signals that there is a big money position being established in the stock, or that short covering is occurring now. If the huge money behind these moves are capable of mobilizing so quickly to positive news, this signals to me that they will be equally quick to mobilize in reaction to negative news.

I am not sure how long this continuation move will last. Eventually there will be a pullback – that is almost certain. But I still suspect we are only in the early phases of this boom for Tesla. I expect Tesla to generate more buzz and excitement as the year goes on.

In addition, I re-established the position in 3D Systems (DDD), according to the logic outlined in my article. Events are playing out as I had expected, with upgrades in the stock, and higher prices. This lends credence to the idea that we experienced a test phase from January to March, and we are now in a phase 4 type boom. Therefore, there should be additional room to go with the DDD long.

C & J Energy  (CJES) continues to be a dead weight in both the portfolio. The bad news about the state of the hydraulic fracturing market is out, and I believe it has been priced in. I think we have put in a bottom in this range (~$18). I dont expect the stock to dip below $17 unless the market turns worse.

I expect the market to improve as the year goes on and higher natural gas prices lead to renewed excitement in dry gas plays.

I am working up a position in some dry gas E&P companies as we speak. I do not want to reveal names and tickers, as they are tiny companies, and I have to be very cautious to establish a position at the prices I would like. I have been able to find several that are trading well below book value currently, and I have reason to expect that the book value itself is artificially low, because it is based on a past price environment, where natural gas prices were much lower than today. I will write an article soon explaining the logic.

I am using my unleveraged portfolio to purchase the dry gas companies. I am selling off a previous purchase of Halliburton (HAL). Halliburton has also come to a fair valuation in the current environment. After the settlement of the Deepwater Horizon litigation, the shares have been relieved of the pressure that was depressing them. I suspect HAL will benefit if the activity in the North American gas market picks up, but I believe the benefit will be more pronounced in CJES, so I prefer an investment in the latter.

I also sold my shares in Petroleum Geo Services (PGSVY). It is a shame to sell off such a well run company, with such growth potential. It is still undervalued, and I expect that investors at these prices would do reasonably well holding this for the long term. 3D and 4D seismic technology is only becoming more and more important, and PGS has already accumulated the Multiclient studies for the vast offshore Africa fields. However, I think there are better opportunities, like BBBI.

I am slowly accumulating more shares of Birmingham Bloomfield Bancshares (BBBI). It is currently trading at a price to book of .5, and it seems to be generating earnings at a comparable pace to BNCCorp (BNCC). The deep discount offers a considerable margin of safety, and the growth, fueled by the automotive industry boom, is bound to continue for the foreseeable future.

Reflexivity fails to explain the latest moves in 3D Systems Corporation

I am glad I exited the short at $30. 

3D Systems (DDD) has continued to make acquisitions. However, it is currently funding these acquisitions with cash on the balance sheet, rather than new equity issues. This eliminates a major component of the original long investment thesis. 

I would ordinarily take such a signal as a positive sign that the company has escaped the reflexive boom and bust unscathed, and thus is poised for the “plateau of productivity”, as outlined in my article. However, the stock still trades for a P/E of 96 (using GAAP earnings). Even if we use the company provided non-GAAP growth rate of 43%, the company trades for a PEG ratio above 2. 

This is still an overvalued company. And, as long as the company is not utilizing the high share price to fund growth, I can see no benefit to the overvaluation except an increase in risk of investment. 

It’s cash levels will not sustain acquisitions indefinitely, so it might be supposed that 3D Systems will eventually switch to leverage-funded acquisitions, but without any proof that this is occurring,  I believe it is too risky to take a long position in the company.