Why Jim Chanos and Hedge Funds Hate Tesla

Jim Chanos of Kynikos laid out more of his reasoning for being bearish on Tesla Motors Inc (NASDAQ:TSLA) during an interview with CNN Money this week. The famed short seller has been a Tesla bear for two years, although it’s unclear if he’s shorting the stock and if so, for how long he has been doing so. While praising Tesla’s vehicles, Chanos says the company has a long way to go to reach the lofty valuation it’s received from investors (it’s valued at half of what General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) are, despite selling a fraction of the vehicles).

“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.

The latest comments aren’t a surprise, as Chanos has criticized Tesla Motors Inc (NASDAQ:TSLA) in the past for being a “cult stock” that flies in the face of fundamentals and instead rises on frenzied speculation. As Chanos said back in May during an interview with Bloomberg, that frenzy is further fueled by over-eager analysts, yet these “people who have precise valuations for 2025 can’t seem to get the current quarter right”.

Whether elite hedge funds collectively like a stock or not is an important metric to consider, as these large investors show a great level of skill and expertise when it comes to picking stocks. Over the last few years equity hedge funds have trailed the market by a large margin, but that’s mostly due to their hedging and short positions (this is particularly true of a market bear like Chanos), which perform poorly in a bull market. Their long positions performed far better, especially their small-cap picks, which have the potential to beat the market by 95 basis points per month on average, as our backtests showed. Our small-cap strategy involves imitating a portfolio of the 15 most popular small-cap picks among hedge funds and it has returned 102% since August 2012, beating the S&P 500 ETF (SPY) by over 53 percentage points (read more details here).

While one could look at Tesla’s stock performance in the last two years (gains of 21.94%) since Chanos’ bearish calls began and say that he has ultimately been wrong to this point, that doesn’t necessarily mean his thesis was ever wrong; only that it was overpowered, at least until now, by the stock’s positive momentum. However, that momentum appears to be swinging, with even analysts beginning to take a starker view of Tesla’s position. Shares fell by over 10% last week as multiple analysts downgraded or cut their price targets on the stock, as we’ll see on the next page.

Barclays PLC (ADR) (NYSE:BCS) downgraded Tesla to ‘Underweight’ from ‘Equal Weight’ on Friday, and cut its price target to $180 from $190, stating that Tesla was facing pressure on its gross margins and deliveries guidance due to manufacturing challenges. Robert W. Baird & Co. downgraded it to ‘Neutral’ on Wednesday, from ‘Outperform’, and cut its price target to $282 from $335, citing the Model X’s unexpectedly higher price point as being a threat to the vehicle’s projected sales. Even Tesla bull Morgan Stanley (NYSE:MS) cut its price target to $450 from $465, suggesting that Model X sales targets would be difficult to reach next year due to its price.

Alongside Chanos, the elite hedge funds tracked by Insider Monkey have collectively been bearish on Tesla Motors Inc (NASDAQ:TSLA) for some time. Back in February, we ranked Tesla as the stock hedge funds in our database were betting against the most. Just 25 hedge funds were long Tesla at that time, while 22 had positions of put options underlying shares of the company. Fast forward two quarters and the sentiment hasn’t shifted much, as 26 hedge funds were long Tesla, owning just 4.10% of its shares, while 15 funds still held positions of put options underlying Tesla shares.

Leading the bears’ charge was Paul J. Isaac’s Arbiter Partners with a position of put options underlying 822,300 shares of Tesla, with the position being his most lucrative with a value of over $220 million. Other investors betting against Tesla include Leon Shaulov’s Maplelane Capital, with a position of put options underlying 470,000 Tesla shares, and GRT Capital Partners, founded by Gregory Fraser, Rudolph Kluiber, and Timothy Krochuk.

Disclosure: None