Here's Why Tesla's Stock Is Crashing

NEW YORK ( TheStreet) -- By all accounts, Tesla Motors ( TSLA)  reported strong third-quarter results, but when a company's stock becomes irrationally inflated relative to the actual financial performance, strong isn't strong enough.

Tesla's reported 5,500 vehicles delivered last quarter -- 10% more than guidance. Albeit short of euphoric prophecies, everyone's expecting more-than-perfect execution from a company building a reputation for delivering the unexpected. It's the euphoria surrounding the share price that is guiding me to warn investors to take some money off the table while the valuation is rich.

Tesla reported a 12-cent profit, well ahead of whisper numbers of 9 or 10 cents and slightly above Thomson Reuters 11 cents. That's where the problem lies, because as great of a company as Tesla may be (and few are disputing the quality of its product or leadership), there is no amount of financial mathematical gymnastics one could perform to arrive at the conclusion that the potential reward justifies the risk.

The saving grace for Tesla investors this week comes from the massive short interest. Short interest is the proportion of shares that have been shorted relative to the overall number of shares actively traded, known as the float. Normally, when a company is performing well and meeting expectations, the short interest is small, perhaps 2% to 5%.

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For example, Ford's (F) short interest is about 2% of the float, General Motors (GM) has 7.7% and Toyota Motors (TM) is less than 1%. In comparison, Tesla's short interest is more than 25%, and that doesn't include synthetic shorting by large hedge funds. You can learn more about synthetic shorting from Tesla's Index Entry Is a Two-Sided Coin.

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