Tesla’s (TSLA) shares sharp fall on Wednesday was typical for a commonly shorted stock, so investors should not worry too much, said JBC Cramer of CNBC.
“Tesla’s reversal today is something that inevitably happens to red-hot stocks that are too heavily shorted,” the “Mad Money” host said at Wednesday. “But unlike so many other heavily shorted names, Tesla’s too legit to quit.”
Tesla shares rose nearly 20% on Monday and then rose 13.7% on Tuesday to peak at $968, but despite a sharp and sudden sell-off, shares continued to rise 75% since the start of 2020.
Wednesday brought a 17.18% pullback in Tesla shares, closing the session at $734.70. The decline represented the second worst day for Tesla; it fell 19.3% in one day in 2012.
“This is simply what happens after the sellers let some air out of the ball, although the fact that Tesla’s still up 75% for the year tells you there’s plenty of helium left," Cramer said.
Cramer also rejected Tesla’s comparison with massive run of Bitcoins at the end of 2017, when it hit a record high of almost $20,000, and a short squeeze on Tilrey in 2018, when the hemp company grew from $109 to almost $3030 during the day, in only a few sessions.
“I think the stock can go lower ... but I think that those comparisons are ludicrous,” he said. “Bitcoin was overwhelmed by multiple alternative currencies. Tilray was one among many marijuana companies that came public around the same time, and it was shorted way too soon by many hedge-fund managers, and there was no supply. ”
According to Cramer, Tesla is a legitimate business. Tesla is at its core a "technology company on wheels" that has shown plenty of growth potential, he said. Tesla uses less energy and emits much less carbon. Its growth occurs at a time when consumers around the world are beginning to take measures to reduce emissions.
“Their product uses less energy and produces far fewer carbon emissions in a world where consumers actually care about that stuff.”
Cramer said Wednesday’s sale was made possible by a special set of factors.
Part of Tesla’s price movement can be attributed to what Cramer calls a “natural buyer.” This applies to anyone who buys Tesla shares to “establish an actual position” instead of covering a short position. These investors simply continued to sell stocks and take profits, which created “a genuine burden that really scared the market,” a CNBC host said.
Also investor Ron Baron, who said that, in his opinion, Tesla’s income could reach $1 trillion in 10 years. Cramer said Baron, which owns more than 1 million shares of the company, was “been right for ages” about Tesla. Therefore, the news of his appearance on CNBC could provoke some speculative investors to buy shares before he went on air.
But by Tuesday evening, the people who bought the stock on Monday wanted to make a profit. “When they started blasting their bids, they knocked the stock off its $900 pedestal,” Cramer said. “They were selling real stock - not simply shorting it - so there was genuine heaviness that really spooked the market."
But Cramer believes that the market will not be scared all the time. “I don’t know when it will come back to $968 again. Maybe it will take a while ... but when it gets back there, I bet it keeps climbing,” he said.