Should You Buy Tesla Motors Inc (TSLA)?

It’s a little-known fact that stock performance is not evenly distributed (i.e. you don’t have a 50/50 chance of picking a market-beating stock). In fact, despite the S&P 500 gaining about 5.2% between November 1, 2014 and October 30, 2015, less than 49% of the stocks in the index beat the market during that time. In contrast, the 30 stocks from the index which were the most popular among the investors that we track returned 9.5% during that time and 63% of them beat the market. This shows that while hedge funds get a lot of flak from the mainstream media for their performance, it can be rewarding to follow their moves using the right sets of data. The data, though, shows that following the collective wisdom of select hedge funds can be a very wise move overall.

Tesla Motors Inc (NASDAQ:TSLA) was in 29 hedge funds’ portfolios at the end of December. TSLA investors should pay attention to an increase in support from the world’s most elite money managers in recent months. There were 26 hedge funds in our database with TSLA positions at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity, but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Yahoo! Inc. (NASDAQ:YHOO), Luxottica Group SpA (ADR) (NYSE:LUX), and Emerson Electric Co. (NYSE:EMR) to gather more data points.

According to most shareholders, hedge funds are viewed as worthless, outdated investment tools of years past. While there are more than 8000 funds trading at present, Our experts choose to focus on the bigwigs of this club, about 700 funds. These hedge fund managers handle the lion’s share of the hedge fund industry’s total capital, and by observing their highest performing stock picks, Insider Monkey has formulated numerous investment strategies that have historically exceeded the market. Insider Monkey’s small-cap hedge fund strategy outpaced the S&P 500 index by 12 percentage points per annum for a decade in their back tests.

Back in April 2013, Longboard Asset Management issued a report in which it predicted that Tesla’s stock would trade at $200 within five years. At the time the stock was trading around the $40 mark and it reached $200 less than a year after the report. Longboard also predicted that Tesla would dominate the market of Electric Vehicles and compared the company’s importance in the EV industry with Apple’s role in the smartphone market.

Currently, Tesla’s stock is trading at around $201 per share, and as it was one of the most shorted stocks at $40, it still remains highly shorted now with almost 29% of the float being short. At the current scale Tesla is still more a high tech stock rather than automotive, but the company plans to expand its deliveries after it opens its Gigafactory in Nevada. Moreover, the company has recently expanded its product line and has started deliveries of its Model X SUV and plans to launch a budget version of a fully electric vehicle, Model 3, which will be revealed at the end of March.

Nevertheless, the company run by Elon Musk still has more room to grow and has to prove to investors that it is a worthy holding. Meanwhile, the stock remains to be considered overvalued by many long and short investors, with notorious short-seller Jim Chanos of Kynikos Associates being in the latter group. Mr. Chanos has mentioned on several occasions that he might be short Tesla. During an interview with Bloomberg in October, 2015, Chanos said:

“[…] what Tesla had is innovation and a head start in this market that other companies are now catching up to. And they have to become a car manufacturer. And becoming a car manufacturer is a lot more difficult than becoming a high tech darling.”

During another interview with CNN Money (also in October, 2015) Chanos also criticized the stock and said that Tesla has a long way to go before it can justify its high valuation.

“I think Tesla’s got a great product, but Tesla’s gotta navigate from being a, basically, small boutique, elite car manufacturer, to a mass market automobile manufacturer. That’s a very, very difficult thing. To compete with the likes of BMW and GM is a different matter than just selling 50,000 $100,000 cars. […] In order to sell millions of cars, which is where the stock is valued…they’ve got a long way to go,” Chanos said.

Keeping this in mind, we’re going to review the key action encompassing Tesla Motors Inc (NASDAQ:TSLA).

What does the smart money think about Tesla Motors Inc (NASDAQ:TSLA)?

At Q4’s end, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, an increase of 12% from one quarter earlier. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Andor Capital Management, managed by Daniel Benton, holds the number one position in Tesla Motors Inc (NASDAQ:TSLA). Andor Capital Management has a $240 million position in the stock, comprising 34.2% of its 13F portfolio. The second most bullish fund manager is Citadel Investment Group, managed by Ken Griffin, which holds a $189.1 million call position; the fund has 0.2% of its 13F portfolio invested in the stock. Some other members of the smart money with similar optimism encompass Mike Masters’s Masters Capital Management, and Guy Shahar’s DSAM Partners.

As aggregate interest increased, key hedge funds have been driving this bullishness. Tide Point Capital, managed by Christopher A. Winham, initiated the most valuable position in Tesla Motors Inc (NASDAQ:TSLA). Tide Point Capital had $27.6 million invested in the company at the end of the quarter. Dirk Ziff’s ZBI Services also initiated a $17.3 million position during the quarter. The other funds with new positions in the stock are James Crichton’s Hitchwood Capital Management, and Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali’s Alta Park Capital.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Tesla Motors Inc (NASDAQ:TSLA) but similarly valued. We will take a look at Yahoo! Inc. (NASDAQ:YHOO), Luxottica Group SpA (ADR) (NYSE:LUX), Emerson Electric Co. (NYSE:EMR), and Sony Corporation (ADR) (NYSE:SNE). This group of stocks’ market valuations are closest to TSLA’s market valuation.

As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $1.72 billion. That figure was $837 million in TSLA’s case. Yahoo! Inc. (NASDAQ:YHOO) is the most popular stock in this table. On the other hand Luxottica Group SpA (ADR) (NYSE:LUX) is the least popular one with only 4 bullish hedge fund positions. Tesla Motors Inc (NASDAQ:TSLA) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard YHOO might be a better candidate to consider a long position.