On November 15th I suggested a paired trade where investors would buy 11.5 shares of Exide Technologies (XIDE) and short one share of Tesla Motors (TSLA). Over the last two months, investors who made the trade on November 15th would have realized the following gains.
|Buy 11.5 Exide||-$30.59||$36.69||$6.10|
|Sell one Tesla||$33.93||-$22.79||$11.14|
|Pair trade total||$3.34||$13.90||$17.24|
A conservative trader might very well call it a day and close both positions at this juncture. A less conservative trader might be inclined to push his luck a little further. I’m squarely in the second camp.
Almost half of the gain on the Tesla short came on Friday afternoon when Tesla collapsed in the last 45 minutes of trading and closed at $22.79, down $5.46 from its Thursday close pf $28.25. The apparent reason for the collapse was the loss of two engineering executives over the last month. While no small company likes to lose important employees, I have a hard time imagining any circumstances where the loss of two employees would justify a $570 million market cap beat down. While I’ve never seen a company schedule an emergency conference call to discuss something this trivial, that’s exactly what Tesla has done. The market reaction, or over-reaction if you prefer, coupled with management’s extraordinary effort to calm the market strikes me as clear proof that Tesla’s unrealistically high share price has become brittle. This is a stock that wants to fall and is looking for almost any excuse to do so. My tracking chart that plots 10-, 20-, 50- and 200-day volume weighted moving average prices is looking just plain ugly as the 10- and 20-day averages have plummeted down through the 200-day average.
Exide, in comparison, is looking stronger today than it did in mid-November. I’ve recently explained how the liquidation of a hedge fund that owned over 30% of Exide’s stock in January 2009 has been a big contributor to market volatility over the last two years. I’ve also speculated that a final push to liquidate the hedge fund’s position before year end was the primary reason for the fourth quarter price decline. At this point my tracking chart for Exide is looking very strong as the 10- and 20-day averages push up through the 50-day average.
With Tesla’s stock price looking increasingly frangible and Exide’s price looking increasingly firm, I’d be inclined to keep the pair trade open until we have a third-quarter earnings release from Exide.