Vilas Capital Shorting “Massively Overvalued” Tesla Stock; Likes Ford, Honda, More

Seeing as how the third quarter is in the rear-view mirror, many hedge funds have released their latest investor letters to describe their performance during the three-month period. Among the standout performers for the period was John Thompson’s Vilas Capital Management, LLC, which saw its portfolio gain 42.2% during the third quarter. Due to the big gain, Vilas Capital is now down by 17.2% year-to-date, after significant first-half losses.

Due to the fund’s blow-out performance from July 1 to September 30, Insider Monkey decided to cover the fund’s latest investor letter, including its commentary on several stocks, including Tesla Motors Inc (NASDAQ:TSLA), Ford Motor Company (NYSE:F), Honda Motor Co Ltd (ADR) (NYSE:HMC), BP plc (ADR) (NYSE:BP), and Citigroup Inc (NYSE:C).  For those interested in further car-related reading afterwards, be sure to check out this interesting article on the 11 most expensive cars to insure.

At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on, can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see the details).

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According to its third quarter investor letter, Vilas Capital remains extremely bearish on Tesla Motors Inc (NASDAQ:TSLA). Having previously argued that the company is worth a market cap of just $5-to-$10 billion (versus the company’s cap of about $35 billion at that time), Thompson’s fund is still short the stock, owns out-of-the-money puts, and has also written calls. In addition to being “massively overvalued”, Thompson thinks Tesla is over-hyped, will never produce material profits, and is raising considerable amounts of capital for “projects that make little economic sense.” Vilas Capital isn’t the only institution bearish on Tesla Motors Inc (NASDAQ:TSLA). Around 23% of the company’s float is short at the moment, a number that is considerably higher than average.

While it may be short Tesla, Vilas is long two automotive mainstays, Honda Motor Co Ltd (ADR) (NYSE:HMC) and Ford Motor Company (NYSE:F), the latter of which was a new addition to its portfolio last quarter. Thompson likes both companies because they trade at low book value multiples and at low price-to-earnings ratios, due to the fact that each has been out of favor for the last six quarters. While some of the under-performance is due to the concern that a recession might occur in the future that might depress earnings, Thompson thinks much of the negative repercussions of a recession have already been priced into their shares.

Of the 749 hedge funds that we track which filed 13Fs for the June quarter, 31 were long Ford Motor Company (NYSE:F) at the end of June, while eight held shares of Honda Motor Co Ltd (ADR) (NYSE:HMC).

On the next page we’ll examine what John Thompson had to say about BP and Citigroup.

Vilas Capital re-bought into BP plc (ADR) (NYSE:BP) in the third quarter, as Thompson likes BP’s 7% dividend yield and the fact that it was/is trading close to book value. Given that Thompson expects oil prices to rebound over time, BP’s dividend will likely become safer and the stock will likely trend higher, should the money manager’s prediction pan out. 40 funds that we track owned $1.76 billion worth of BP plc (ADR) (NYSE:BP) shares on June 30, up from 34 funds with $685.46 million in shares on March 31.

Last but not least, John Thompson is bullish on Citigroup Inc (NYSE:C), as the stock ranks as the fund’s largest holding in the financial services sector. Thompson is long because he thinks that Citigroup will trade considerably higher as interest rates normalize and as returns on capital increase. Given that Thompson thinks that his basket of financial services stocks should be worth around 1.5-times book value in normalized conditions, and seeing as Citigroup trades at just 0.68-times book value, Citigroup could have over 100% upside potential under ideal conditions. The number of hedge funds in our system with holdings in Citigroup Inc (NYSE:C) fell by four quarter-over-quarter to 97 at the end of June.

Disclosure: None