What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing over the years. Tesla has been one of the most popular stocks among short selling hedge funds, who thought the company was overvalued, as i'm sure you all know, this short position was a complete disaster for any hedge fund, unfortunate enough to take it on since 2019, the stock has increased. Almost 20-fold one of the biggest losers was a hedge fund manager, david einhorn, einhorn's, hedge fund, green light capital used to be one of the most successful on wall street and he managed more than 12 billion dollars at the peak. But in the mid-2010s he started shorting, tesla and other growth stocks which decimated his performance.

Hedge funds generally do not have to disclose their performance, but einhorn founded an insurance company called greenlight re which invests its premiums in his hedge fund. It's publicly traded and has lost seventy percent of its value since its 2007 ipo, because they're publicly traded they're required to disclose their investment returns. They've underperformed the s p 500, every single year since 2012.. If you invested 100 in ironhorns portfolio in 2012, you would have 100 today, if you invested this into the s, p 500 you'd have almost 400.

In light of the abysmal performance, their investors started to flee the sinking ship by 2021. Their assets under management had fallen by 80 from their peak. If he keeps up their current rate of underperformance for another few years, there will likely be no money left at all greenlight massively underperformed the s p 500. In 2020, as his tesla short position dragged down his performance as the stock kept going up, he mitigated his risk by reducing the position and thus avoided catastrophic losses and, on the bright side, a lot of his deep value.

Long positions actually did very well. For example, their single largest position is green brick partners, a property developer, which has increased 80 since the beginning of kovid it looked like einhorn was on his way to a comeback if he could finally close down his tesla short position and focus on his deep value. Longs there was a chance that he could turn things around for his dying hedge fund, but instead of giving up, einhorn is actually doubling down on his bearish tesla position. In the fourth quarter of 2021, he bought 100 000 tesla puts with a notional value of 105 million dollars.

That makes it the third largest position in his fund in this video we'll look at why einhorn is shorting tesla again and what will be the likely result? David einhorn is a value investor. He buys stocks which have cheap price to earnings, multiples and short stocks that are losing money or have high valuations. Tesla was obviously the type of company that he would be sure they were losing money for many years as they invested heavily in ramping up model 3 production. While he was short tesla.

He was long general motors as they were highly profitable and had a price to earnings ratio of less than 10.. That's about what you would expect from a value investor. Throughout 2020 and 2021, dozens of new electric vehicle-related companies went public and many of them reach absurd. Valuations, for example, lucid achieved a peak valuation of 90 billion dollars before they made any significant deliveries.

Even more absurd is rivien which reached a peak valuation of 162 billion dollars shortly after their ipo, despite the fact that they only made a handful of vehicle deliveries. If you think even tesla is overvalued, you would probably also think that rivien, the electric car company that has yet to sell any cars is crazier, given the insane valuation. You'd think that this would be a prime candidate for ironhorn to short in a recent investor letter einhorn says that he met with rivian's sponsors all the way back in 2018 and was impressed by their technology. He made a small investment at a 10 billion valuation before the company went public.

He bought rivie and puts to hedges shares after the ipo and locked in a roughly 10 times gain on his investment, and he says he still believes in the long term. Prospects of rivien, while the percentage gain was quite impressive. It was a small position for the fund and they still underperformed the s p 500 in 2021. As usual.

This is a big shift for ironhorn and it looked like. Maybe he was finally starting to change his view on electric vehicles talks but despite him, being bullish on rivien he's still bearish on tesla and even doubled down on his short position with 100 000 put options, it's very difficult to understand what he's thinking if you are Really bullish on evs, it could make sense to buy shares of both tesla and rivien if you think they can disrupt the traditional automakers over the next five to ten years. On the other end of the spectrum, you might think the pureplay ev companies are over hyped. Both tesla and rivian trade at much higher valuations compared to the detroit automakers, so you might want to long gm and ford while shorting, tesla and rivien.

In between these two extremes. You have kathy wood who's been a long time, tesla bowl, but says she won't buy any rivien shares because it's too overvalued while tesla's priced and earnings ratio is well over 100 at least they're making some net profit. They delivered 936 000 vehicles in 2021 and their market cap is about 936 billion dollars, so they're valued at almost exactly one million dollars per delivery. Rivien has almost zero revenue and the most recent quarter they burned through more than one billion dollars due to production issues.

Rivien delivered a grand total of 920 vehicles in 2021 with a market cap of 58 billion dollars that translates to about 63 million dollars of market cap per delivery or 63 times tesla's valuation. Obviously, rivien is just getting started with its production going forward. Their percentage growth will be much higher than tesla just because they are starting from such a low base. The point is, if you're a value investor like david einhorn, it doesn't make a whole lot of sense to think that rivien is undervalued when you think that tesla is overvalued.

So why exactly does he think tesla will go down? We can get some insights in his most recent quarterly investor letter. The crux of his thesis is that inflation is getting out of control and the fed is way behind the curve. The consumer price index has been exploding in recent months, reaching 7.5 year-over-year growth. This january, the fed is expected to start raising rates soon and start to gradually taper their asset purchases, but even today the tapering is not yet complete.

So as we speak, they're still printing tens of billions of new dollars every month to buy bonds. Most analysts think that they'll raise the federal funds rate to one percent by the end of 2022., with inflation running at seven and a half percent that would still leave a real interest rate of negative 6.5 percent. It's pretty laughable to think that this will be enough to fight inflation. Einhorn thinks the stock market has gotten so used to easy money from the fed that, as soon as they raise interest rates significantly, the market will crash as people see their stock portfolios.

Tanking they'll cut down on discretionary purchases causing a recession in the real economy. Powell knows this and wants to hold off tightening as long as possible as he doesn't want to be blamed for a recession. Inflation often hits low-income households the most as they have less bargaining power with their employers, so their wages will increase by less than inflation. Eventually, the situation will become untenable and the fed will be forced to act by this point.

Inflation will be so entrenched in the economy that the fed will have to raise rates far faster than most people expect, causing a massive market crash and recession. When this happens, stocks like tesla, which benefit the most from the bubble inflating, will crash the hardest. That's why einhorn double down as tesla short position to be clear? I don't necessarily agree with this scenario: it's just einhorn's opinion and given his performance over the past 10 years. His predictions should be taken with a grain of salt, but there is a growing consensus among value-oriented investors that the fed will have to raise rates much higher than they are now and gross stocks will crash.

Recently. The famous value investor dr michael, bury sold almost 100 of the stocks in his hedge fund scion asset management, similar to einhorn. He seems to believe a market crash is imminent. If there is a fed induced crash, ravine will probably be one of the hardest hit stocks.

Given how overvalued it is, at least on traditional metrics, to be fair, he hedged most of his position with puts which are now deep in the money, so he basically doesn't have a long position anymore. It was more of a short-term trade than a long-term investment. Let's suppose that einhorn's predictions are correct, inflation will continue raging out of control, and the fed will eventually be forced to raise interest rates more than expected. It is true that this will hurt tesla and other growth stocks, but it's not the only driver of tesla's share price.

Even if interest rates go up, it's possible that tesla beats earnings expectations so much that can completely offset the interest rate headwinds. If you think nominal interest rates will go up, it's probably a better idea to short bonds such as the tlt etf bond prices, are inversely related to yields. So if yields go up, bond prices will go down by definition with that being said, it's possible that einhorn is also short bonds. We don't know because hedge funds are not required to disclose their short positions in his investor letter.

He also said commodities like oil and corn could be pushed substantially higher by inflation. This makes a lot of sense during the 1970s stagflation period. Energy was the best performing sector by far as oil companies benefited from higher oil prices and it looks like he is positioning his portfolio to benefit from higher commodity prices. He owns shares of a thermal coal company called tech resources, a chemical company called keymores, and another cool company called console energy.

If inflation does run hot these commodity producers should be big winners, while einhorn's tesla shorting activities have ended disastrously in the past. It looks like he may have gotten it right this time, at least so far since the beginning of 2022 tesla's stock price has fallen by 23 as part of the broader technology sell-off, but given the high risk associated with shorting tesla, if you believe in einhorn's inflation Thesis, it's probably better to buy shares of commodity producers instead, that would allow an investor to get upside from higher inflation, while avoiding potentially infinite losses from a tesla short, alright guys that wraps it up for this video. What do you think about ironhorn shorting tesla again? Do you think the fed will be able to fight inflation in 2022? Let us know in the comments section below, as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.