Shares of Tesla Motors Inc (NASDAQ:TSLA) are up more than 2% in pre-market trading after the company launched its Model X sports utility vehicle last night. The Model X will be the world’s first electric SUV with falcon wing doors and will be Tesla’s second mass produced model after the Model S. The Model X has a range of 250 miles and includes a ‘bioweapon defense mode’ option that ramps up the vehicle’s HEPA air filter to remove toxins from biological weapons. In this article, we take a closer look at the electric car maker and see how the world’s greatest investors view the company.
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We mention the hedge fund activity concerning Tesla because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated a double-digit alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 60 percentage points (118% return vs. the S&P 500’s 57.6% gain) over the last 36 months (see the details here).
Tesla Motors Inc (NASDAQ:TSLA)’s stock was originally correlated with crude when energy prices first fell, but has successfully dissociated from the price of the commodity now. Investors no longer believe that lower gas prices at the pump will lower demand for Tesla’s electric vehicles. Tesla shares are up over 10% year to date while crude prices are close to their lows.
A big reason for the dissociation is the Model X. The Model X has experienced some delays as Musk “got a little carried away” by adding too many features and demanding perfection from the vehicle. Now that the Model X has been launched, investors are hoping that the vehicle can turn Tesla profitable after years of losses. Demand for the Model X has been strong, with Musk reporting pre-orders reaching 25,000 for the vehicle that can cost as much as $144,000. This compares to the 50,000-55,000 vehicles that Tesla is expected to deliver this year. If Tesla can execute on the Model X, investors will be more confident on Tesla’s road map to half a million vehicles by 2020.
Hedge funds are cautious on Tesla Motors Inc (NASDAQ:TSLA). According to our data, 26 hedge funds owned $1.39 billion of the company’s shares (representing 4.10% of the float) on June 30, versus 29 funds and $1.04 billion respectively at the end of March. Moreover, among the funds we track, many own positions in ‘Put’ options underlying shares of Tesla. For example, Ken Griffin‘s Citadel Investment Group increased its position by 34% to 1.37 million shares held in ‘Put’ options during the second quarter, while Paul J. Isaac’s Arbiter Partners Capital Management raised its ‘Put’ stake underlying 842,000 shares. Overall, 25.94 million shares, or 25.7% of the float, were short on September 15 versus 22.19 million shares short on September 15 2014. Among investors that own shares of the company, Daniel Benton’s Andor Capital management reported holding 1.0 million shares in its latest 13F.
Analysts are divided on the stock. Currently, 13 analysts have ‘Buy’ ratings, eight have ‘Hold’ ratings, and five have ‘Sell’ ratings. Yesterday, Morgan Stanley reiterated its ‘Buy’ rating. Moreover, Bank of America has an ‘Underperform’ rating and a price target of $180 per share. Overall, analysts have a consensus price target of $294.09 per share, giving Tesla shares an upside of 19.23%.
Given that Tesla is scheduled to produce 50,000-55,000 vehicles versus General Motors’ 9 million+ vehicles this year, Elon Musk and his company need to execute well to deliver an upside for shareholders. There is some potential, however, as the transportation market is worth a trillion dollars and is in a need of disruption as global warming becomes more serious. Elon Musk is widely regarded as the world’s best CEO and Tesla shares have additional upside if the company executes in the battery and ride sharing sectors as well (see article). For now, the market is firmly fixated on the launch of the Model X. Any glitch or good news concerning the SUV will affect Tesla’s stock substantially.
Disclosure: None
