Tesla and Amazon Drive the Shorts Crazy

 | May 16, 2013 | 11:10 AM EDT  | Comments
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Stock quotes in this article:

tsla

,

amzn

Hard-to-value stocks are such bummers. How do you value a car company that makes only 21,000 cars, even as it makes money on them? How do you value an online company that dominates Internet commerce?

The answer is simple: You don't. You can't. You can't, because there's a confluence, an actual formula, for what's going on here. You take a service or product that is much loved, you verify constantly that it is loved, whether it be because of the rapid adoption of the online service or a terrific rating in Consumer Reports, and you add in sudden profitability and a chance for long-term dominance and then sprinkle on nonbelievers who short the stock because the usual valuation works are defied, and they can't be defied forever. The result? You get Tesla Motors (TSLA) at $10 billion, and you get Amazon (AMZN) at 220x earnings.

Now, the mechanics of the stock market are working in favor of these two stocks -- the mechanics meaning the difficulty of the short-selling process. You can't just sell stock when you short; you have to borrow stock to sell it, and that has been very difficult in the case of Tesla, where 41% of the stock is sold short. Anyone who buys this stock is the enemy of the shorts, because the shorts are going to demand that stock. The shorts are frantic to find stock, and when they can't, the brokers just buy the stock in to cover the short.

Amazon is a stock that seasoned professionals think it is their duty to short. They feel it is just very important to bet against a company with that high a price-to-earnings ratio.

The shorts don't care that Amazon might take over the world. They think it is priced as if it will. Which means there is nowhere but down. But the bulls say that the company is spending like crazy to be the biggest and the best, and that means that when it wants to, it will show the profitability that makes the price-to-earnings multiple much lower.

Tesla? What can I say? The simple truth is that it is a really cool car, and my friends who have them love them. I would like to get one. I bet that many who are short the stock would like to get one. In the meantime, the CEO does an equity offering to pay off a despised government loan, and the CEO buys a ton of it! That was supposed to be the chance for the shorts to cover.

No such luck. Not enough stock. So the short-busting continues.

I know when I can value something, and I know when I can't. I can't value either of these companies, so my bottom line is that they are dangerous both ways, for gamblers who gamble without an edge, so count me out. I will let others do the wagering. 

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