Finally!
This is no doubt the cry of Tesla bears everywhere.
Shares of the controversial electric car maker — the most heavily shorted stock — are down about 21 percent from their June 18 peak of $370.83. And they fell around 14 percent in July alone.
Now, Wall Street awaits the company’s second quarter results after the market closes Wednesday.
Anthony Bozza of Lakewood Capital Management is among the hedge fund managers hoping Tesla’s summer dip is the start of a prolonged and steep descent. The long-short firm, which manages $5.2 billion, was down about 4 percent in the first half of the year. A major factor was its bleeding short book, precipitated in part by Tesla.
But Lakewood enjoyed a sharp reversal of fortune in July, again driven by Tesla and other short positions that changed trajectory as the stocks plummeted in price. The firm gained 4.6 percent gain over the month, according to a fund investor. As a result, Lakewood is roughly flat for the year.
The company declined to comment.
When Lakewood lost 1.2 percent in the second quarter, short equity positions generated a negative 11 percent return on capital, according to its second-quarter letter obtained by Institutional Investor. Long equity positions, in contrast, generated a positive 2 percent return on capital.
Bozza blamed three stocks for the outsized losses in its shorts: Tesla, Canopy Growth, and Celltrion, the letter said. Each rose by double-digit percentage rates in the first six months of the year even though, in Bozza’s view, “significant challenges lie ahead for those companies and their stock valuations.”
There was one consolation: Lakewood limits the fund’s overall short exposure to a “modest portion of the portfolio.” The short book is heavily diversified, with no single position cutting into performance by more than 50 basis points in each of 2018’s opening two quarters, according to the letter.
In the case of Tesla, shareholders are growing increasingly concerned about the car maker’s production levels, its cash burn rate, and whether the heavily leveraged company will need to borrow more money, among other worries.
In a Monday report, UBS predicted second quarter results will “likely highlight cash flow and profit challenges” and that Elon Musk’s operation “will eventually need additional outside funding.” UBS targeted $195 per share of Telsa, suggesting another 30 percent drop off the next 12 months.
Tesla is currently the market’s most shorted stock, with nearly $11 billion in downside interest, according to a recent report from S3 Partners, a financial technology and analytics firm.
The two other big short-side losers that Bozza highlighted likewise sharply changed direction in July.
Shares of biopharmaceutical firm Celltrion fell 17.7 percent for the month, despite making up some ground with a 7.5 percent surge Tuesday. As we earlier reported, Bozza made the case for shorting the Korean drug-development company at a New York financial conference in early May, asserting that the company aggressively overstated its revenues.
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And Canopy Growth — a medical marijuana outfit — is down about 11 percent this month.
Altogether, Lakewood’s shorts made money in July, according to the investor.
Most of the month’s gains, however, derived from the long book.
At the end of the first quarter, its top five holdings — which accounted for more than one-quarter of equity — were Chinese search giant Baidu, Google parent Alphabet, financial services giant Ally Financial, auto-parts maker Adient, and cable and media conglomerate Comcast.
Baidu was up slightly for the month but is trading around where it was last October. The company has been bogged down by losses from its “online-to-offline” investments and iQiyi, its online video platform.
Google and Comcast each added more than 8 percent while hospital giant HCA — Lakewood’s sixth largest long at the end of the second quarter — surged 20 percent.
In the second-quarter letter, Bozza highlighted two more stocks he’s betting will fall. Axon Enterprise — formerly Taser International — also manufactures body cameras, making it a hot stock around 2015 during a rash of police shootings.
Lakeview’s managing partner noted that Axon shares subsequently halved due to disappointing financial performance. The company is trying to rebrand as a “software-as-a-service play,” Bozza explained. The stock has swelled five times from its lows despite worsening losses in its body camera business and its “aggressive use of interest-free financing to bolster an over-earning weapons business.”
Axon is now a core short for Lakewood.
Continuing on a theme, the other short is AeroVironment, which produces small military drones and tactical missile systems. Bozza said that the company claims to have developed the “first practical electric car.”
To the hedge fund manager, AeroVironment has long benefitted from a certain aura among investors, who’ve seen it as a groundbreaking play in the future of warfare. “However, the company’s actual results have painted a far less exciting picture,” he noted in the letter. The stock has tripled in 15 months, making it an attractive short opportunity.
