Short-sellers might be rigorous in their methods, but Tesla CEO Elon Musk hasn’t made it easy to short the stock of his automaker, CNBC’s Jim Cramer said Wednesday.
“There are four fundamental problems that make shorting stocks especially dangerous, problems that are bedeviling these professional pessimists as they confront perhaps the greatest short-buster in modern memory, … Elon Musk,” the “Mad Money” host said.
Cramer spoke one day after Musk floated the idea of taking Tesla private on Twitter, igniting an 11 percent run in the stock and costing Tesla’s short-sellers roughly $1.3 billion. Tesla’s board of directors maintained in a statement on Wednesday that no final decision has been made.
Musk’s $420-a-share price target showed “why it’s so tough to bet against individual companies,” Cramer argued, turning to the first flaw: the notion that Musk did something wrong by opining on his company’s future.
“Musk has every right to say that he has a potential $420-per-share takeover bid lined up, provided that he doesn’t sell stock into the hype,” Cramer explained. “As long as there’s no dump with the pump, it’s arguably a legitimate thing to say.”
“Why not? The SEC doesn’t specifically say you can’t ponder what a company’s worth or whether the company might get a bid,” he continued. “In fact, Twitter’s absolutely … the place to disseminate this possibility.”
Second flaw? The presumption that a government agency like the Securities and Exchange Committee (SEC) or the Justice Department will get involved if something illegal or inappropriate is occurring, Cramer said.
To illustrate this flaw, the “Mad Money” host referenced “When the Wolves Bite,” a chronicle by CNBC’s Scott Wapner of the heated battle between Wall Street titans Carl Icahn and Bill Ackman in the stock of Herbalife.
“This is something that Bill Ackman learned the hard way when he publicly shorted Herbalife,” Cramer said. “Ackman, in desperation, did everything he could to get any federal agency to crack down on Herbalife and put it out of business because of what he saw as some really atrocious business practices.”
“In the end, Ackman lost a fortune because no agency took the bite,” he said.
Third, the short-sellers — whose strategy involves borrowing shares of a stock on the belief that it will decline, selling them and then buying them back at a lower price, thus turning a profit — rely on other sellers to knock their desired stock down.
“Who in his right mind is going to sell Tesla if there’s even a possibility of a leveraged buyout?” Cramer said, referring to Musk’s assertion that funding has been “secured” and a Financial Times report that said Saudi Arabia’s sovereign wealth fund bought a 3 to 5 percent stake in Tesla.
Fourth, Cramer took some inspiration from the words of legendary investor and economist John Maynard Keynes: In the long run, we’re all dead.
“I think Elon Musk can keep the balls in the air longer than the shorts can stay short,” he said. “He could’ve told the Saudis that he’d sell them $2 billion in stock right from the company if he wanted to, right? Then what?”
All in all, Musk’s power to sway Tesla’s investors and secure funding from giants like Tencent for his electric car maker made Cramer believe in his ability to out-maneuver the shorts in the near term.
“You’ve got to understand: Elon Musk is a weird mix of Thomas Edison, David Blaine, and the Punisher. He’s a showman, a visionary, and he’s ruthless,” Cramer said. “I wouldn’t recommend Tesla up here, but you know what? You’d be crazy to short it.”
Shares of Tesla ended Wednesday’s trading session down 2.43 percent, at $370.34. Tesla’s most high-profile short-sellers include Greenlight Capital’s David Einhorn and Kynikos Associates’ Jim Chanos.