Another Investor Talks About Shorting “Cult” Stock Tesla (TSLA), Plus Talks Longs and Shorts in Dell, Gaia, and Land’s End

Greenhaven Road Capital is a New York-based hedge fund run by Stanford Business School graduate Scott Miller. Greenhaven Road is a value-oriented partnership, which mainly focuses on the technology, retail, consumer, and business industries. It claims to have delivered 9% gross returns in the third quarter, and 117% returns net of fees and expenses since its inception, versus 95% for the S&P 500 and 73% for the Russell 2000.

In its third quarter letter to investors, Greenhaven detailed its top moves during the quarter and shared analysis on some of its positions. We’ll have a detailed look at the investment firm’s comments and also assess how other hedge funds feel about these stocks in this article.

At Insider Monkey, we track more than 750 hedge funds, whose 13F filings we analyze as part of our small-cap strategy. Our research has shown that imitating a portfolio that includes the 15 most popular small-cap stocks among hedge funds can outperform the market by as much as 95 basis points per month on average (see more details).

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Tesla Is a “Cult” Stock

Greenhaven is short Tesla Motors Inc (NASDAQ:TSLA). Miller thinks Tesla is a “cult” stock with a broken business model, which sees the company lose money on every car sale. Miller added that there is a “very, very, very low” chance that Tesla will deliver its promised Model 3 in time, with 20% margins intact. Like Jim Chanos, Miller also sees no sense in Tesla’s acquisition of SolarCity Corp (NASDAQ:SCTY). The investor said Tesla is set to face intense competition amid a flurry of new players in the industry. He added that Tesla’s stock is built on the “myth” of the unquestionable genius of Elon Musk. At the end of the second quarter, 36 funds tracked by Insider Monkey held $1.13 billion worth of Tesla Motors Inc (NASDAQ:TSLA) shares.

This ETF With High Exposure to Tesla Could Also Be At Risk

The Market Vectors Glbl Alter. Engy ETF Trst (NYSEARCA:GEX) is a New-York based ETF which has 10.7% exposure to Tesla Motors Inc (TSLA) according to Morningstar data. If the electric car maker takes a beating in the future, the ETF is bound to feel the pain as well. Market Vectors is an exchange-traded fund that invests in alternative energy industries such as solar power, wind energy, water-based energy, and other renewable energy resources. Some of the other stocks with high representation in the ETF are Eaton Corporation, PLC Ordinary Shares (NYSE:ETN), First Solar, Inc. (NASDAQ:FSLR), and EnerSys (NYSE:ENS).

VMware’s Pair Trading Secret

Greenhaven is long and short VMware, Inc. (NYSE:VMW). Dell Technologies Inc (NYSE:DVMT) recently completed its $67 billion acquisition of storage giant EMC, which owned 80% of VMware’s shares. Instead of paying EMC shareholders 100% in cash, Dell gave $24.05 per share in cash and .11 Dell Technologies Inc (NYSE:DVMT) shares per EMC share, letting EMC shareholders retain some of their stake in VMware. DVMT is thus a “tracking stock” that was created to track the performance of Dell’s ownership of VMware. According to Miller, if Dell ever faces bankruptcy, Dell Technologies Inc (NYSE:DVMT) will be affected, not VMware. Miller’s plan is to make money through DVMT’s tracking stock discount, which is the difference in the price Greenhaven paid to acquire its DVMT shares, and the price of VMware shares, through the discount narrowing. This “pair trade” technique makes Greenhaven indifferent to VMware, Inc. (NYSE:VMW)’s price and business dynamics.  A total of 41 funds from within our database were long VMware, Inc. (NYSE:VMW) at the end of the second quarter.

On the next page we’ll discuss the rest of the important stocks which Greenhaven Road Capital discussed in its third quarter investor letter.

Greenhaven’s Hidden Gem: Gaia

Greenhaven Road Capital invested in Gaia Inc (NASDAQ:GAIA) in the third quarter, a company which Miller admits is ‘invisible’ due to its tiny market capitalization. But 75% of Gaia’s market cap consists of cash and real estate and it is gaining customers in a large and growing market. Gaia’s CEO, Jirka Rysavy, who also founded Fortune 500 company, Corporate Express, owns 38% of the company. Rysavy has an impeccable track record of sound execution in various sectors. In the second quarter, Gaia sold its big branded business for $167 million and its travel business for $12 million. The company is now left with a video streaming business which Miller thinks has an edge due to its niche-focused approach. Gaia streams content related to Yoga, nutrition, parenting, and related topics. The fund’s investor letter said that Gaia has a fully funded business model, and that the company can grow by as much as 50% per year. It generates greater than 80% gross margins. Although the investment has not been profitable yet, Miller thinks future growth prospects and downside protection make Gaia a good stock to own. John W. Rogers’ Ariel Investments owns 1.52 million shares of Gaia Inc (NASDAQ:GAIA) as of the end of the second quarter.

Lands’ End Will Continue to Fall

Greenhaven Road Capital is also short Lands’ End, Inc. (NASDAQ:LE), a company which Miller thinks has leadership problems. The letter said the company’s EBITDA was less than $10 million in the first-half of 2016, while its net debt is a whopping $280 million. Land’s End’s ex-CEO, Federica Marchionni, who used to spend little time in the company’s headquarters in Wisconsin, tried to radically shift Lands’ End’s brand towards high-end fashion, from what Miller calls “dowdy”-themed clothing. That strategy failed. The company is now being run by an interim CEO, an approach Miller thinks does not often work. Chuck Royce’s Royce & Associates is one of ten hedge funds tracked by Insider Monkey which owned shares of Lands’ End, Inc. (NASDAQ:LE) at the end of the second quarter.

Disclosure: None