Can A Company Be Great And A Great Short?

by John Rubino

One of the fascinating things about financial bubbles is how they transform great companies into screaming short sale candidates. Put another way, bear markets tend to throw even the prettiest babies out with the bathwater.

Here, for instance, is what happened to Cisco Systems, the dominant maker of networking gear (the devices that run the Internet) when the 1990s tech stock bubble burst, bankrupting many of its customers and causing its earnings to miss expectations. Its stock fell by more than three-fourths and those who had bought it during the previous year’s euphoria got hosed.

Cisco recovered, as great companies do, and continues to lead its part of the tech world. Current market cap: $160 billion.

And here’s Bank of America, which was a rock-solid dividend paying machine during the 2000s housing bubble – until the bubble burst and everyone defaulted on their mortgages. B of A stock fell by 90% and it stopped paying dividends, leaving its (mostly retiree) shareholders with massive capital losses and zero current income.

It too subsequently recovered and, along with Goldman, Morgan and its other money center bank peers, is now back to manipulating markets with impunity and paying rich dividends. Its market value is a little north of $270 billion.

Which brings us to the current bubble, bigger and broader than its predecessors and so – presumably – full of more great companies about to morph into life-changing shorts. Consider Tesla:

You have to love this company. Founded and run by Elon Musk, who inspired the Tony Stark character in Iron Man, it’s a leading maker of electric cars (which are both insanely fun to drive and the solution to the oil part of the fossil fuels dilemma) and solar panels (solution to the coal part of fossil fuels). So it’s about as cool as a company can be.

But after rising by more than 1000% in the past five years it now trades at nearly 6x sales – an extremely rich multiple for an established company – and is having some dramatic production problems with its newest models:

Tesla: Model 3 production problems prompt electric Semi delay

(Green Car Reports) – Tesla’s aggressive goals for Model 3 production have run into a series of setbacks, and the knock-on effect spilling over into the company’s planned electric semi truck debut, which has again been pushed back from its overdue September launch.Elon Musk announced the later, November 16 unveil date for Tesla Semi via Twitter, while blaming both “Model 3 bottlenecks” and the ongoing humanitarian situation in Puerto Rico for the delay.

Earlier this year, Tesla announced plans to produce up to 5,000 Model 3s per month by the end of 2017, though the announcement was met with skepticism at the time.

A report last week by The Wall Street Journal revealed the company is producing major components of the car by hand, and confirmed production is falling well short the stated goals.

Though Tesla claims the report overstates the extent of the problems facing the factory, Musk did admit on twitter that the Model 3 is “deep in production hell.”

Between the continued production difficulties and Tesla’s efforts to send battery packs to Puerto Rico, the company decided to “recalibrate” the timing for both Model 3 production and the truck’s official debut.

To sum up, Tesla is facing a combination of richly-valued stock, overvalued stock market, and failure to meet its goals for this and presumably the next couple of quarters. So it fits the profile of the great company with internal and external problems that make its stock price hard to justify.

Will it (and its Big Tech peers) be the next Big Short? That probably depends on when the current bubble bursts and whether governments this time around respond by directly buying large cap stocks. Those things are unknowable, but right now the shorts have a lot of data points on their side.

Full disclosure: Various members of the DollarCollapse staff are looking hard at shorting Tesla.

90 views

Follow IWB on Facebook and Twitter