The stock market is a very interesting place: for every transaction there is a counterparty, meaning that when one someone is buying someone else is selling, and they both believe to be doing the smart thing. Even better, on some occasions investors can explicitly bet against the positions of others, for example buying stocks with heavy short interest.
Observing a big short position as a percentage of float is not a reason enough to make a solid investment decision; however, it can magnify returns when the company has the right fundamentals. If the bears are wrong, and the company is on the road to success, short covering can create spectacular gains as many short sellers rush to buy the stock in order to cover their positions.
These three companies have innovative business models and a big disruptive potential, which means that they could deliver exciting gains if things turn out as expected. In addition to that, heavy short interest could magnify the gains once short sellers realize that they are positioned on the wrong side of the trade. Three disruptive companies to bet against heavy short interest.
Tesla Motors Inc (NASDAQ:TSLA) is a risky investment proposition, the future viability of the high end electric cars manufactured by the company depends on several complex variables, both technical and economical. In fact, the company has recently suffered a setback when the New York Times published a negative review about its Model S sedan.
According to the article, the vehicle didn’t have enough battery juice to complete the trip from Washington DC to New York, and it had to towed from Branford, Conn. Based on this review, the car didn´t perform as expected, since it’s supposed to deliver 265 miles per charge.
But the company has Elon Musk, one of the most successful and innovative leaders in corporate America, on its side. Tesla´s CEO and cofounder was quick to respond and present the company´s logs for the car tested. Musk wrote a detailed blog post explaining how the logs contradict the information in the article on several aspects, and he even said that the reporter from the New York Times, John Broder, intentionally lied about what had happened.
Overall, it seems like Tesla may come out reasonably well from this problem, and the episode can be considered a good show about the company as an investment proposition. The challenges are enormous, but Tesla and its management team are up to them. With a short interest ratio near 37% of the float, this stock may deliver electrifying returns if the business continues growing.