The issue of publicizing and trading around research; Doug Kass' bearish take on Tesla; Six analyst reports on Tesla

1) During the nearly 18 years I ran multiple hedge funds and mutual funds, I frequently spoke and wrote publicly about my positions – both long and short...

As a result, I often – hundreds of times – faced the thorny issue of whether and how investors can trade around information they have that could potentially move a stock. That includes publishing their own research, writing or speaking positively or negatively about a stock, or collaborating with a journalist on a story.

Because the law is so vague, I was always very careful with my trading so that I was never in a gray area, much less cross a line.

For example, I didn't add to my short position in Lumber Liquidators after I brought the story to 60 Minutes and was interviewed by Anderson Cooper, even when I knew a week beforehand when the segment was going to air and was quite certain that it would tank the stock (which it did). (You can watch the segment, which aired on March 1, 2015, here.)

I could have made millions of dollars buying short-term puts on the stock... But I didn't want to have to explain/defend this if my trading records became public either because the company sued me or regulators investigated me (which, to my surprise, never happened).

Similarly, I never traded stocks in the days before or after I spoke about them at conferences or during my hundreds of appearances on CNBC, for two reasons: a) it seemed slimy... and b) I thought it might get me into trouble and damage my reputation, my most valuable asset.

I mention all of this because two recent news items have me thinking about it again...

First, on Tuesday, the SEC announced a settlement with Ryan Choi – an analyst who worked for Andrew Left at Citron Research (I wrote about Left on July 26, July 29, and September 12).

As part of the agreement, Choi agreed to pay more than $1.8 million to settle the charges that he was part of a scheme to defraud Citron readers in relation to a couple of posts on X issued by Citron.

Here's the SEC release with more details: SEC Settles Action Against Beverly Hills Resident For Involvement In Scheme to Defraud Readers of Citron Research Tweets. Excerpt:

In July 2024, the SEC charged Andrew Left, who operates the Citron Research website and related social media platforms, for engaging in a scheme to defraud Citron Research followers by publishing false and misleading statements regarding his supposed stock trading recommendations.

The SEC's complaint against Choi alleges that in December 2020, Choi worked with Left on the research and content for two buy recommendations that Left issued through Citron Research. According to the complaint, Choi failed to act reasonably by not conducting adequate research or due diligence, which he provided to Left to support the recommendations that Left included in the Citron Research tweets.

And that's not all – as the release continues:

The complaint further alleges that Choi quickly traded on price increases that came after the two Citron Research tweets, and negligently failed to ensure that this trading activity was adequately disclosed in the tweets. According to the complaint, Choi made a total of $1,647,217 in profits in connection with his trading around these two tweets.

On Wednesday, Bloomberg columnist Matt Levine – one of my favorite writers – discussed this news: Be Careful Tweeting About Stocks. Excerpt:

It's a strange complaint, no? [Left and Choi] didn't even say "we're long VUZI." They said they wouldn't short it, and they didn't. Choi "did not conduct adequate due diligence or research on VUZI," says the SEC, but adequate for what? To not short it? To buy some call options? To tweet that tweet? That tweet said "still doing research"! It would be hard to read that tweet and think "Citron has done extensive research on VUZI and thinks it's a buy," since the tweet actually says that (1) Citron is not short VUZI and (2) it's still doing research.

You see what the SEC wants to say, what it thinks happened. The SEC thinks that Left and Choi were doing a pump and dump, that they were trying to trick their audience into buying VUZI so they could sell. But it doesn't quite say that, presumably because it doesn't have proof. Instead it says that Choi "negligently engag[ed] in conduct that operated as a fraud on the readers of Citron Research," and "failed to act reasonably by not conducting adequate research or due diligence."

Meanwhile, the second item related to the issue of publicizing and trading around research that caught my eye was a post yesterday by Edwin Dorsey of The Bear Cave newsletter about suspicious trading around three bearish Wall Street Journal articles: Problems at The Wall Street Journal. Excerpt:

Join me as we explore some of the Wall Street Journal's reporting as well as trading that appears to be done in advance of market-moving Wall Street Journal stories...

As a newsletter author who occasionally publishes market-moving stories, it is inconceivable to me to text someone the timing of when I plan to publish a potentially market-moving article.

And if I saw evidence that someone improperly traded around The Bear Cave's articles, I would distance myself from that person and rely on a lawyer's advice about any reporting obligations.

It seems the Wall Street Journal has done the exact opposite, leading to newer concerns.

In summary, my take is that the SEC seems to be saying that if folks are publicizing and trading around their own research, it better not look too much like a pump-and-dump scheme (admittedly, a very vague line)... otherwise, the feds might come after you.

2) Following up on yesterday's e-mail about Tesla's (TSLA) earnings report, which sent the stock up an incredible 22% (its best day in 11 years), my friend Doug Kass of Seabreeze Partners published these notes yesterday about why he's adding to his short position in the stock, which he kindly gave me permission to share with my readers:

I believe that Musk's claim that Tesla really cut costs as much as he says is spurious.

I think the company is playing with the depreciation account.

At the end of the second quarter, PPE (property, plant, and equipment) was $32.9 billion. It then spent $3.5 billion on capital expenditures during the third quarter, so that equals $36.4 billion.

When one subtracts depreciation, amortization, and impairment of $1.3 billion, you would expect PPE at the end of the third quarter to be of $35.1 billion.

Yet reported PPE was $36.1 billion, $1.0 billion above what one would expect.

Doing the same calculations in the first and second quarters, Tesla's PPE was only $184 million and $575 million, respectively, higher than expected.

And as Doug concluded:

It is my view that Tesla is spending cash but calling it an asset and capitalizing it in PPE rather than expensing it.

This is a highly suspicious pattern – and I think it's telling that the company allowed only two positive analysts on its earnings call.

I am expanding my short position above $240 now.

Later, he added:

The sharp drop in cost per vehicle is even more questionable as the more expensive Cybertruck was included in the mix this quarter.

After the prior disappointing quarters, Musk likely knew that everyone was keying on the margins in the auto business so he had every incentive to make the numbers work out.

All this and yet sales were slightly below expectations, the robotaxi event was a bust, and Musk's promise of a $25,000 car was abandoned. He desperately needed something positive.

I am accelerating my shorting over $242.

Thank you as always, Doug!

If I were forced to take a position, with Tesla's market cap at an astounding $836 billion and the stock trading at such a nosebleed valuation, I would definitely join Doug on the short side.

But that's the beauty of investing... you're never forced to take any position.

So as I've said repeatedly, I don't think the stock is a good long or a good short.

3) Below are summaries of six analyst reports on Tesla's earnings, which my friend Scott Tashman of Outset Global sent me.

As you can see, they reflect the huge range of opinions on Tesla's stock, with updated price targets ranging from $135 per share (from JPMorgan Chase) to $310 per share (from Morgan Stanley):

Barclays

Barclays says Tesla posted a solid Q3 beat, reflecting upside on margin. While the Q3 report doesn't change the underlying debates around the company's autonomous vehicle strategy or the question of 2025 volume and the potential for "Model 2.5," it should be deemed a positive as it reflects positive fundamentals "for now," the analyst tells investors in a research note. The firm believes Tesla estimates will get "rightsized and likely past the worst on margins." It keeps an Equal Weight rating on the shares with a $220 price target.

Bank of America

BofA raised the firm's price target on Tesla to $265 from $255 and keeps a Buy rating on the shares after the company reported Q3 non-GAAP EPS of 72c, which was "well ahead" of BofA at 59c and consensus at 60c in a beat that the firm says "was almost across the board," driven mainly by stronger Auto gross profit and higher regulatory credits. Following the report, the firm is raising its EPS estimates "slightly" due to improved gross margin in Q3 as a result of lower raw costs, the Cybertruck ramp, execution/cost cutting, regulatory credits, and higher volume, the analyst tells investors.

Goldman Sachs

Goldman Sachs analyst Mark Delaney raised the firm's price target on Tesla to $250 from $230 and keeps a Neutral rating on the shares. The company reported better gross margins in Q3 and reiterated that it expects vehicle volumes to grow in 2024 as well as deliveries to increase by 20%-30% in 2025, the analyst tells investors in a research note. The firm believes the earnings report "is an incremental positive," with stronger margins than expected. However, key debates will include whether Tesla can meet its full self-driving performance and vehicle delivery growth targets for 2025, and also the sustainability of margins, adds Goldman.

Guggenheim

Guggenheim raised the firm's price target on Tesla to $156 from $153 and keeps a Sell rating on the shares after the company reported Q3 margins meaningfully better than consensus, guided to implied Q4 volumes of about 515,000, versus the Street [of]about 495,000, and guided to 2025 sales volume growth of 20% [to] 30%. While the firm says it "struggles with this figure" for sales volume growth given limited details around new models and Cybertruck growth becoming harder to underwrite, it acknowledges that Street estimates "will likely move higher on this guidance."

JPMorgan Chase

JPMorgan analyst Ryan Brinkman raised the firm's price target on Tesla to $135 from $130 and keeps an Underweight rating on the shares. Investors expected Tesla to grow earnings year-over-year for the first time in Q3 after six straight quarters of declines, the magnitude of improvement likely caught them by surprise, with the company generating $2.7B of operating profit, the analyst tells investors in a research note. The firm expects this "surprising earnings beat to power a strong positive reaction" in Tesla shares today. However, at the same time JPMorgan sees several potentially unsustainable drivers of Q3's better earnings and cash flow performance, including near-record sales of 100% margin regulatory credits and atypically large working capital benefits.

Morgan Stanley

Morgan Stanley analyst Adam Jonas says "one of the strongest Tesla prints in a while" could mark a "bottom" in auto earnings expectations and sentiment. Specific comments about "slight" [Fiscal year] '24 delivery growth and next-gen/lower-cost new product intros from the second half of 2025 help to address investor concerns around top-line growth, though large growth in [capital expenditures] raises near- and long-term questions about the capital intensity of the business and "the business model itself," the analyst tells investors. Morgan Stanley has an Overweight rating and [a] $310 price target on Tesla shares.

Best regards,

Whitney

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