The evidence against an investment case for Tesla (TSLA) is “overwhelming” and should, eventually, lead Baillie Gifford’s James Anderson to significantly reduce his weighting to the electric car maker, according to Jupiter’s James Clunie.
Tesla currently accounts for around 6% of Anderson’s Morningstar Gold-rated Scottish Mortgage (SMT) and has done wonders for the ever-popular trust’s stellar performance over recent years. It's also owned - and has been backed - by other Baillie Gifford fund managers.
Clunie’s Morningstar Bronze-rated Jupiter Absolute Return fund has been on the opposite side of that trade, with a sizeable short position on the stock. In fact, Clunie has short positions on 15 stocks Scottish Mortgage holds, which have not been helpful to performance.
Still, Clunie has doubled down on those bets by initiating a small short position on the trust itself. While professing respect for his intelligence and long-term track record, Clunie describes Anderson as “my nemesis; my alter-ego”.
Other stocks Clunie’s betting against Anderson on include inline streaming service Netflix (NFLX), e-commerce firms Amazon (AMZN) and Wayfair (W), and Chinese electric vehicle maker Nio (NIO). “I think a lot of this stuff is overpriced and it has fragility,” explains Clunie.
But it’s the holding of Elon Musk’s Tesla, who’s largest shareholder is Baillie Gifford, that baffles Clunie the most. “I read [Anderson’s] stuff because it’s intelligently written, but I’m left wondering why he’s the largest Tesla shareholder. What is it about it? I really struggle, but I’m really interested.
“If you read the newsflow, it’s overwhelmingly negative – competition coming in, all sorts of production and staff issues, directors leaving, massive director selling, regulatory issues. My view is that [Anderson] should… take his Tesla position down. If he’s smart enough to do that… then I would say, ‘well, actually, he’s living right’ and take [the short position on SMT] away.”
Morningstar rates Tesla as a three-star stock, which means that it is fairly valued, but analysts are cautious about its short-term prospects: "We do not see it having mass-market volume for at least another decade. Tesla's product plans for now do not mean an electric vehicle for every consumer who wants one, as the prices are too high."
How Clunie Decides Which Stocks to Short
Explaining his strategy for shorting stocks, whereby an investor will borrow a stock today in order to buy it back at a lower price in the future, Clunie says he looks at a number of things.
In the main, he’s looking for stocks that appear overpriced on a discounted cash flow basis, which compares the current share price against the present value of expected future cash flows using a discount rate.
Other reasons to borrow stock are where you need to make really strong assumptions on future growth to justify current share prices, weak balance sheets or particularly aggressive accounting practices.
With growth investing currently trumping fundamentals-based value investing, Clunie has been losing by being on the opposite side of the trade to Anderson. “I keep asking myself what mistake I have made,” he continues.
“What I’ve done is what I call ‘sensible’ stuff and maybe that’s my weakness: it’s too logical, it’s too evidence-based, it’s too sensible.”
One short position that has worked in Clunie’s favour and against Anderson is Nio. The firm, which makes and sells electric cars for the Chinese consumer, listed on the New York Stock Exchange in September at around $6.
Its share price movements have been volatile since, reaching a quick peak of $11.6 before slipping below its IPO price soon after. It re-rated back to just above $10 in early March before its market value was slashed in half after what Clunie describes as “catastrophic” quarterly results.
“I looked at the shareholder register and I think you can guess who’s on. If you buy loss-making companies with enormously aggressive assumptions, bad stuff can happen,” he concludes.
“But I admire [Baillie Gifford’s] track record and I think they’re great, but that’s where the battle line is. We’ll see how that plays out. Hopefully there’s scope in the long run that we’re both right.”
