Short squeezes have been all the rage on Wall Street in 2021. But even with its massive short interest, traders shouldn’t expect a short squeeze from Tesla (NASDAQ:TSLA) stock anytime soon.
GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) are just two examples of stocks that skyrocketed this year thanks to short squeezes. Short sellers have always liked TSLA stock. But it takes more than just a large amount of short interest to trigger a short squeeze.
The most important factor when it comes to a short squeeze isn’t total short interest.
Anatomy of a Short Squeeze
It’s short percent of float. A company’s total number of existing shares are its shares outstanding. However, a significant portion of those shares outstanding are typically held by large institutional investors and company insiders. On a standard day in the market, big institutions and company executives aren’t trading millions of dollars of stock.
Everyone familiar with the basics of a free market knows that price is typically determined by market supply and demand. In the stock market, the number of shares of stock is the supply side of the equation. If company insiders and institutions aren’t selling, their shares aren’t available to contribute to the available market supply.
A company’s “float” represents the total shares not held by company insiders or institutions. In a practical sense, it represents the effective supply of shares available to trade freely on the market.
A short squeeze is triggered in part when there is not enough supply of shares to meet demand. That dynamic sends a stock’s share price soaring. And that soaring share price triggers short sellers to cover their positions by buying stock. The more short sellers cover, the bigger the losses remaining short sellers endure.
At some point, the positive feedback loop hits the point of no return and the stock takes off to the moon.
Short percent of float is calculated by taking the total short interest and dividing by the total float. It’s a crude estimate of just how explosive a short squeeze could be if all the short sellers are forced to cover all at once.
TSLA Stock vs. GameStop
According to Ortex Analytics, TSLA stock recently had a total short interest of about 32.36 million shares. At a share price of about $645, short sellers were betting $20.87 billion against TSLA stock.
GameStop recently had about 8 million shares held short, according to Ortex. At a share price of $169, that means GameStop’s total short interest was about $1.35 billion.
So how is it that GME stock experienced the mother of all short squeezes back in January? Meanwhile, TSLA stock is down 4.7% year-to-date.
GameStop’s short percent of float recently was about 13.3%. Any number over 10% is relatively high, but it’s nothing crazy for a company like GameStop that is struggling so badly. Tesla’s short percent of float is currently just 4.1%, which is certainly nothing extraordinary.
Back on Jan. 15, GameStop’s short percent of float was an eye-popping 107.7%. That extremely high short interest coupled with the flood of Reddit traders buying the stock is the reason GME stock skyrocketed from under $20 to as high as $483 in just a couple of weeks. It was a classic short squeeze.
Since that time, GameStop’s short interest and short percent of float plummeted. It’s no coincidence the stock has dropped back below $165 as well.
What Does This Mean for Tesla?
Yes, short sellers are betting $20.87 billion against Tesla, which is a massive amount of money. But Tesla is a $620 billion company with a huge float. It’s highly unlikely there will ever be the type of supply shortage in TSLA stock that triggered the AMC and GameStop short squeezes earlier this year.
TSLA stock is not a great short squeeze candidate. Tesla is a story stock. It trades higher or lower based on the story that CEO Elon Musk and other Tesla enthusiasts spread about the company’s potential to completely take over the global auto, energy, technology and transportation industries in the long-term.
When chapters get added to the story, the stock goes higher. Musk is an excellent storyteller, and he has legions of followers willing to listen to anything he says.
By almost every objective fundamental valuation metric, TSLA stock is extremely overvalued. But I have always said story stocks are too dangerous to go long or short. I continue to recommend investors simply stay away from TSLA stock all together.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.