The world’s most shorted stock prepares for its S&P 500 debut

As market watchers have spent much of November assessing the impact of the US election result and the arrival of viable Covid-19 vaccines, one of the most intriguing individual battles between a company and its short sellers has taken another turn.

Last week, S&P Dow Jones Indices indicated that it would include Tesla in the blue-chip S&P 500 index, prompting the stock to jump by a third in the following days and making founder, Elon Musk, the second richest person on the planet.

News of the decision is just the latest episode in the long-running battle between Musk and Tesla short sellers. Readers may remember that in July of this year, Tesla began selling satin “short shorts” in an attempt to taunt short sellers following a surge in the company’s share price.

At that time, we reported how speculation that Tesla was about to enter the S&P 500 had prompted many short sellers to exit their positions at a loss. However, for those that remained – we estimated 11.3m Tesla shares were still held in short positions following that “short squeeze” – more bad news was to come. The next month, short sellers lost $9.5bn on Tesla bets, at the time the tenth successive month of unprofitable short bets against the company and the largest monthly loss since the Tesla went public in 2010.

Tesla Short Interest

Shares on loan in Tesla since 2018

Whilst often referred to as the world’s most shorted stock, the battle between Tesla and its short sellers has been largely one sided so far in 2020, with on-going speculation about Tesla’s entry into the S&P driving the share price continually higher. Confirmation that this would happen next month has further punished short sellers who, according to our data, have lost $8.1bn so far in November.

Yet, this is unlikely to be the end of the story. We estimated earlier this year that inclusion into the S&P 500 would automatically trigger $40bn of Tesla buy orders, creating a “hype premium” around the stock which we now know will be realised from December. For many short sellers, concerns about Tesla’s valuation – and those of other EV stocks – remain valid and they will be anticipating that the price surge in 2020, in Tesla’s case over 550%, will present more opportunities on the sell side in 2021.

As Bob Fitzsimmons famously said, the bigger they are, the harder they fall. Short sellers just need to hope they make it through the next couple of rounds.

By Peter Hillerberg, co-founder of Ortex Analytics