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Why I Wouldn't Short Tesla Motors Inc.

Shorting stocks can give investors more options to make money, but I wouldn't short Tesla Motors Inc.

Sure, the idea of short-selling stocks can be enticing for investors who strongly believe a company is overvalued and due to drop in price. It's also enticing to short stocks to make money even if the overall market moves lower.

Take high-flying Tesla Motors (NASDAQ:TSLA) as an example. The young electric-vehicle maker is trading at a market capitalization level that's more than half that of industry stalwart Ford Motor Company (NYSE:F), despite delivering just over 31,000 vehicles in 2014 compared to Ford's global sales of more than 6.3 million cars and trucks. Furthermore, Ford's trading at a forward price-to-earnings ratio of about 7.5, while Tesla is trading at a staggering 80 forward price-to-earnings.

While comparing Ford and Tesla is far from ideal -- because of Tesla's straight-to-consumer business model, far fewer models are on sale, with much higher average transaction prices and margins -- you can understand why 25% of Tesla's outstanding shares are sold short due to its high valuation, compared to less than 3% of Ford's.

Short-sellers were recently rewarded with a 10% drop in Tesla's stock price after a disappointing second-quarter report -- but I wouldn't short Tesla going forward.

Big-time downside
Let's be honest, sometimes the market gets it wrong -- stocks can trade at astronomical price-to-earnings ratios for years, remaining above a company's intrinsic value forever. The reason that's important is that the amount of money you can lose on an investment while short-selling is technically unlimited.

When you go long on a company's stock and are wrong, at maximum you're only out the total sum you invested, nothing more. When you borrow shares to sell short, you're...


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