One investor I tend to keep a close eye on is hedge fund manager Michael Burry. A little over a decade ago, Burry made an absolute fortune by successfully predicting the 2008/2009 US housing market crash and betting against subprime mortgages. His character was featured in the Hollywood blockbuster ‘The Big Short’.
Recently, it has come to light that Burry has a huge short position in Tesla stock. This means he’s betting that shares in the electric vehicle manufacturer will fall. Here, I’m going to take a closer look at Burry’s position on TSLA. I’ll also explain how I’d approach Tesla stock now.
Burry is shorting Tesla stock
Regulatory filings from Burry’s firm, Scion Asset Management, reveal that at the end of March, Burry owned put options on 800,100 Tesla shares.
A put option on a stock allows an investor to sell that stock at a certain price in the future. Sophisticated investors often buy put options on a stock when they expect that stock’s price to fall. If the price does fall, the put options become more valuable.
Based on Tesla’s share price of $668 at the end of the first quarter, the value of Burry’s short bet on Tesla was about $530m. This is clearly a big bet against the stock.
Why is Burry shorting Tesla?
Burry typically doesn’t say much about his positions. He tends to stay out of the spotlight. Since it came to light that Scion has a $530m bet against Tesla, the firm has not said anything about the short position.
However, in my view, it’s pretty easy to see why Burry is shorting Tesla. You see, Burry is a committed value investor. In the past, he’s said his investment style is built around the book ‘Security Analysis’ by Benjamin Graham and David Dodd – which focuses on value investing. “All my stock picking is 100% based on the concept of a margin of safety,” he has said.
Looking at Tesla, it’s hard to see value. Currently, the company has a market capitalisation of $557bn. That’s about 11.5 times the market-cap of Ford. Given that Tesla delivered 499,500 cars last year, it’s valued at about $1.1m per car delivered (versus $11,500 for Ford). Clearly, Burry believes Tesla’s valuation is too high.
How I’d approach TSLA stock now
Tesla does have a number of things going for it. For starters, it’s the clear leader in the electric vehicle (EV) space right now. This industry is growing rapidly and has a long growth runway ahead. In the coming years, Tesla is going to sell a lot of EVs.
Secondly, it has an amazing CEO in Elon Musk. There’s no doubting Musk is a genius. Betting against him hasn’t worked out well in the past.
However, given the size of Burry’s short on Tesla, I continue to think caution is warranted towards the stock at present. Given his track record, I think his view on Tesla is worth noting.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.