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Citron Is Wrong About Tesla Motors (Again)

By Evan Niu, CFA – Mar 3, 2016 at 11:00AM

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Andrew Left made a bad short call on Tesla in 2013, and he's making another one in 2016.

Model X. Image source: Tesla.

Earlier this week, shares of electric automaker Tesla Motors (TSLA -0.19%) got knocked down a notch after short seller Citron Research tweeted that it had taken a short position. 

This isn't the first time that Citron has targeted Tesla. The company, run primarily by Andrew Left, took a stand against Tesla way back in 2013. Needless to say, that short bet didn't work out too well for Left. Citron will be wrong again.

A rather short short thesis
For starters, by virtue of the medium Citron's thesis left a lot to be desired. There's generally not a whole lot you can say in 140 characters, much less an investment thesis. What types of supply and demand problems is Left referring to? Is "news flow" really what investors should base their investing decisions on?

Fortunately, Left appeared on CNBC a day later to discuss his thesis. When asked to provide some evidence or proof as to these supply and demand problems, Left merely pointed to revised earnings estimates from Street analyst (and Tesla bull) Adam Jonas. Instead, he insisted that the current "news flow" is far more important right now. Left believes that the current media cycle is more balanced than in 2013.

Tesla's actual demand problem
As far as Left's concerns about supply and demand? This is utterly baseless. On the supply side, it's true that ramping up production is one of the biggest operational challenges right now. But browsing the Internet from his home in L.A., Left has no more insight into Tesla's progress than you or me. It's not as if he met with management to tour the factory, like other Street analysts have done recently. Elon Musk recently said he expects Tesla to reach its full production rate of 1,000 Model X units per week during the second quarter.

He's also quite mistaken when it comes to demand. On the contrary, Musk specifically said that Tesla is trying to keep demand down right now until production increases:

We took basically every action we could to suppress demand for the X, because production wasn't -- we needed to get production up. There was no point in amplifying demand if production cannot meet that demand. We did our best to really suppress demand, or certainly not encourage demand.

The only demand problem that Tesla has right now is that there's too much of it and the company can't keep up yet.

Follow the flow?
Sure, investor sentiment is an important market factor, but it should never be the basis of any investment thesis, long or short. Left's point on "news flow" being the most important factor right now to his short thesis proves that his call is absolutely not based on fundamentals. Besides, how is a "balanced" news flow bad for Tesla? It makes no sense.

Left has gotten a lot of attention over the years, and Citron has been able to make minor impacts on short-term stock movements. The formula is pretty obvious: Left is front-running himself. He takes a position and then issues a vague short call that helps him profit on said short position.

Like most short positions, this is not a long-term thesis. Unlike some renowned short-sellers like David Einhorn (who may hold on to a short position for years), Left is a short-term trader that's trying to make a quick buck and actually has the sway to fulfill his own prophecy.

If his short thesis had any actual substance, it might be worth worrying about. As it is, Citron is bound to be wrong yet again.

Evan Niu, CFA owns shares of Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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