Hedge funds have no idea what to do about Tesla stock – Fortune

Hedge funds piled into short bets against Tesla Inc. right before the electric vehicle maker unveiled a set of numbers that triggered a hefty share-price rally.

About 18% of the 500-plus hedge funds tracked by data providerHazeltreehad an overall short position on Tesla at the end of June, the highest percentage in more than a year, according to figures shared with Bloomberg. That compares with just under 15% at the end of March.

Those contrarian bets now threaten to saddle the hedge funds behind them with losses. Teslas latestvehicle-sales results, published on July 2, revealed second-quarter deliveries figures that beat average analyst estimates, even though sales were down. Investors pounced on the news, driving the companys shares to a six-month high. Since the beginning of June, Teslas share price has now soared about 40%.

Tesla is likely to see its profit margins improve, helped by lower production and raw material costs, according to Morningstar Inc.s Seth Goldstein, one of the top three analysts covering the stock in a Bloomberg ranking that tracks price recommendations.

The company will likely return to profit growth next year, he said in a note to clients. But how Tesla handles the markets intensifying focus on affordable EVs will be key, he added.

The development feeds into an ongoing sense of uncertainty around how to treat the wider EV market, amid a sea of conflicting dynamics. The industry a key plank in the global race to reach net zero emissions by 2050 benefits from generous tax credits. Yet its also contending with significant hurdles in the form of tariff wars and even identity politics, with some consumers rejecting EVs as a form of woke transport.

In the US, Donald Trump has said that if he becomes president again after Novembers election, hell undo existing laws supporting battery-powered vehicles, calling them crazy. That said, Trump is a huge fan of Teslas Cybertruck, according to Elon Musk, the EV giants chief executive officer.

Meanwhile, the list of internal disruptions at Tesla is long. In April, Musk told staff tobrace for major job cuts, with sales roles among those affected. And the Cybertruck, Teslas first new consumer model in years, hasbeen slow to ramp up.

For that reason, some hedge fund managers have decided the stock is off bounds altogether. Tesla is very difficult for us to position, said Fabio Pecce, chief investment officer at Ambienta where he oversees $700 million, including managing the Ambienta x Alpha hedge fund.

Basically, its not clear whether investors are dealing with a top company with a great management team or whether its a challenged franchise with deficient corporate governance, he said.

However, if Trump wins, it is truly going to be very positive for Tesla, though obviously not amazing for EVs and renewables in general, he said. Thats because Trump is expected to impose massive tariffs towards the Chinese players, which would be beneficial to Tesla, Pecce said.

Investors ended 2023declaringtheyd likely retreat further from green stocks in general, and EVs specifically, according to a Bloomberg Markets Live Pulse survey. Almost two-thirds of the 620 respondents said they planned to stay away from the EV sector, with close to 60% expecting the iShares Global Clean Energy exchange-traded fund to extend its slide in 2024. The ETF has lost 13% so far this year after sinking more than 20% in 2023.

The Bloomberg Electric Vehicles Price Return Index, whose members include BYD Co., Tesla and Rivian Automotive Inc., is down about 22% so far in 2024. At the same time, the metals and minerals needed to produce batteries are at the mercy of wildly volatile commodities markets, with speculators regularly trying to make a quick buck on shifts in supply and demand. Price volatility means some battery manufacturers are having to adjust to a market in which their profit margins have been getting badly squeezed.

Against that backdrop, more traditional automakers are finding themselves under pressure from shareholders to slow down their capital expenditure on EVs, with recent examplesincludingPorsche AG. Polestar Automotive Holding UK Plc, a high-end EV manufacturer, has lost almost 95% of its value since being spun out of Volvo Car AB two years ago. Fisker Inc., another luxury EV maker, saw itsvalue wipedout starting last year and has since filed for Chapter 11 bankruptcy protection.

Soren Aandahl, founder and CIO of Texas-based Blue Orca Capital, said valuations in the EV space are so beat up that hes now avoiding shorting the sector. Its no longer an obvious contrarian bet, because those tend to do best if investors enter when things are a little bit higher, he said. But at this point, a lot of the airs already come out of the balloon.

But Eirik Hogner, deputy portfolio manager at $2.7 billion hedge fund Clean Energy Transition, suggests there may be more pain to come for the wider EV industry. There are still way too many startups that remain sub-scale and with gross margins that are simply too low, he said. As a result, the supply-demand dynamic of the EV market is still very negative.

Ultimately, I think you need to see more bankruptcies before the market starts to look healthier, Hogner said.

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Hedge funds have no idea what to do about Tesla stock - Fortune