Betting Against Automotive Stocks: Short Sellers Target Detroit

The United Auto Workers (UAW) has made bold demands of Ford Motor and the two other major automakers hailing from Detroit. Seeking substantial pay increases and a four-day work week, the UAW's requests have the potential to disrupt industry cost structures, inadvertently boosting non-unionized electric vehicle manufacturers.

According to a recent report by S3 Partners, a renowned short-selling research firm, there is a significant amount of money being wagered against automotive stocks. Short sellers engage in the practice of borrowing stocks they do not own and subsequently selling them, with the hope that prices will plummet, enabling them to repurchase the stocks at a lower price and profit from the transaction. This short sale strategy is classified as a bearish bet.

S3 Partners' findings reveal that short sellers have borrowed and sold approximately $22 billion worth of Tesla (TSLA) stock, making it the most heavily shorted car stock by a wide margin. Rivian Automotive (RIVN) comes in second place with only a fraction of the borrowed stock compared to Tesla. Ford (F) follows closely behind as the third most heavily shorted automaker, with $1.9 billion borrowed and sold by bearish investors.

General Motors (GM) and Stellantis (STLA), the remaining two Detroit-based automakers, also appear on the list as the seventh and tenth most shorted stocks, respectively.

The reason why Tesla is favored as a prime target for short sellers is not shrouded in mystery. Its shares are currently trading at around 58 times the estimated earnings for 2024, significantly higher than the average of approximately 18.4 times for companies listed on the S&P 500 index. On the other hand, Ford is trading at a more modest multiple of about 6.6 times its earnings. It is commonly observed that bearish investors tend to focus on companies with high valuations relative to their industry peers.

In the realm of short-selling activity, the total value of borrowed and sold stocks serves as a crucial metric. This measure accurately captures the extent to which short sellers are exposed to risk. Another relevant gauge is the ratio of short interest to the total number of shares available for trading, detailing the amount of stock sold short relative to its overall availability.

Short Interest in the Stock Market

Short interest, which measures the percentage of a company's stock available for trading that is sold short, is an important metric for investors. In the S&P 500, the average short interest for a stock is around 2%. Tesla, with its market capitalization of approximately $830 billion, has a short interest of about 3%, slightly above average. However, it is worth noting that short sellers do not have substantial capital available to them, given Tesla's massive market value.

Comparatively, traditional automakers like Ford, GM, and Stellantis have relatively lower short interest percentages: 4%, 2%, and 2% respectively. Even during the UAW strike, these percentages remained low.

When it comes to electric vehicle (EV) startups, the short interest is considerably higher. Fisker (FSR) has the highest short interest at 43%, according to S3. Lucid (LCID) follows closely behind with a short interest of 23%. Nikola (NKLA) and Rivian have short interests of around 21% and 13% respectively.

What sets these EV startups apart is their current lack of profitability and free cash flow. This bearish sentiment from investors highlights their skepticism regarding the success of all EV startups.

The presence of high short interest can introduce significant trading volatility. A short squeeze occurs when short sellers rush to cover their bearish bets simultaneously, leading to a sharp increase in stock price that surpasses what might be expected based solely on fundamentals.

For example, Nikola's stock rose approximately 34% on Monday, while the Nasdaq Composite remained flat and the S&P 500 rose only 0.1%. Over the past five days, Nikola's shares have surged by about 80%. During this period, the company announced a new COO and revealed plans to start delivering its fuel cell-powered trucks within a few weeks. These positive developments have contributed to the substantial upward movement in the stock.

Ultimately, short interest provides valuable insights into market dynamics and investor sentiment. It reveals which stocks garner the most attention from short sellers and underscores the potential impact of their actions.