Short squeezes were all the rage on Wall Street in 2021. But even with the huge short interest, traders should not expect a short squeeze from Tesla (NASDAQ:TSLA) stock anytime soon.
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GameStop (NYSE:GME) and AMC entertainment (NYSE:AMC) are just two examples of stocks rocketing this year thanks to short squeezes. Shortsellers have always loved TSLA stock. But it takes more than just a large amount of short-term interest to trigger a short squeeze.
The most important factor in short squeeze is not the total short rate.
Anatomy of a Short Squeeze
It is a short percentage of the float. The total number of existing shares of a company is its outstanding shares. However, a significant portion of those outstanding shares are typically held by large institutional investors and corporate insiders. On a typical day in the market, large institutions and corporate executives don’t trade millions of dollars in stocks.
Anyone familiar with the basics of a free market knows that price is generally determined by supply and demand in the market. In the stock market, the number of shares is the supply side of the equation. If company insiders and institutions fail to sell, their shares will not be available to contribute to the available market supply.
A company’s float represents the total number of shares that are not owned by company insiders or institutions. In a practical sense, it represents the effective supply of stocks available to trade freely in the market.
A short squeeze is partially triggered when there is insufficient supply of shares to meet the demand. These dynamics cause the share price of a stock to rise. And that rising share price encourages shortsellers to hedge their positions by buying stocks. The more shortsellers cover, the greater the losses remaining shortsellers will suffer.
At some point, the positive feedback loop reaches the point of no return and the stock goes to the moon.
Short percentage of float is calculated by taking the total short interest and dividing by the total float. It’s a rough estimate of how explosive a short squeeze could be if all shortsellers are forced to cover everything at once.
TSLA Stock vs GameStop
According to Ortex AnalyticsTSLA shares recently had a total short interest of approximately 32.36 million shares. At around $645, short sellers are betting on $20.87 billion against TSLA stock.
GameStop was recently about 8 million shares short, according to Ortex. At a share price of $169, that means GameStop’s total short-term interest was about $1.35 billion.
So how come GME stocks experienced the mother of all short squeezes in January? Meanwhile, TSLA stock is down 4.7% year-to-date.
GameStop’s short float rate was around 13.3% recently. Any figure above 10% is relatively high, but it’s not surprising for a company like GameStop to have such a hard time. Tesla’s short float rate is currently only 4.1%, which is certainly nothing out of the ordinary.
On January 15, GameStop’s short float percentage was a whopping 107.7%. That extremely high short-term interest rate combined with the flood of Reddit traders buying the stock is why GME stocks skyrocketed from less than $20 to $483 in just a few weeks. It was a classic short squeeze.
Since that time, the short-term interest rate and short-term percentage of GameStop’s float plummeted. It is no coincidence that the stock has also fallen below $165 again.
What does this mean for Tesla?
Yes, shortsellers are betting $20.87 billion against Tesla, which is a huge amount. But Tesla is a $620 billion company with a huge float. It’s highly unlikely that there will ever be the kind of supply shortage in TSLA stock that caused AMC and GameStop’s short squeeze earlier this year.
TSLA stocks are not a great short squeeze candidate. Tesla is a story stock. It’s trading higher or lower based on the story CEO Elon Musk and other Tesla enthusiasts were spreading about the company’s potential to completely take over the global auto, energy, technology and transportation industries in the long run.
When chapters are added to the story, the stock goes up. Musk is an excellent storyteller and he has legions of followers who are willing to listen to anything he says.
Through almost every objective fundamental valuation measure, TSLA stocks are extremely overvalued. But I’ve always said that story stocks are too dangerous to go long or short. I continue to recommend investors to just stay away from TSLA stocks.
At the date of publication, Wayne Duggan had no (direct or indirect) positions in the securities referred to in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publication Guidelines.
Wayne Duggan has been a contributor to US News & World Report Investing since 2016 and is a staff writer at Benzinga, where he has authored more than 7,000 articles. mr. Duggan is the author of the book ‘Beating Wall Street with common sense’ which focuses on investment psychology and practical strategies to outperform the stock market.