After being snubbed last September, Tesla joins the S&P 500 beginning December 21. While Tesla met requirements earlier in July, they only got the green light Monday following the index’s quarterly meeting.
The news sent Tesla shares surging, with share prices rising more than 13% in after-hours trading. Money managers whose funds track the S&P 500 now need to add the company to their portfolios. S&P has yet to announce which company will they remove from the index to make room for Tesla.
Investors have long expected the S&P 500 to include Tesla into their member’s list. After all, the company reported four straight quarters of profit in July. Its current market cap is more than 46 times the minimum required value of $8.2 billion. Last July, Tesla’s value pushed to $256 billion.
Even so, the S&P Committee still excluded Tesla during their September 18 meeting. Analysts believe that the company’s dependence on regulatory credits was the culprit. These regulatory credits add a significant amount to their bottom line. Instead, the index chose Etsy, Teradyne, and Catalent as new entries. During the time, shares fell 21% to $330.21. Tesla did manage to recover and is now trading at $408.09 on yesterday’s close. Its value increased fivefold since January.
Market Cap Made It Hard to Add to S&P
With a market cap at $380 billion, it’s no easy feat for Tesla to join the S&P 500 outright. It is easily the largest company added to the S&P. Outside of Tesla, the S&P 500 index holds $11.2 trillion in assets. From the total, index funds comprise $4.6 trillion, according to S&P Dow Jones Indices.
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In a statement, S&P said: “Due to the large size of the addition, S&P Dow Jones Indices is seeking feedback through a consultation to the investment community to determine if Tesla should be added all at once on the rebalance effective date or in two separate tranches ending on the rebalance effective date.” Most investors expect S&P to go the latter route and add Tesla by tranches. Consequently, large fund managers began tracking Tesla ahead of its inclusion.
Rally or Risk
Analysts from Ned Davis Research say that inclusion in the S&P usually sparks a rally for the stock. However, these gains may last only temporarily. S&P 500 companies that joined the S&P 500 between 1973 and 2018 usually drop behind the index average within a year.
Even more, some skeptics think that Tesla’s joining the index brought risk to everybody else. David Trainer, CEO of New Constructs, says steep competition in China and Europe might play a part. “S&P is making a big mistake and adding lots of downside risk to the index by including Tesla,” Trainer said. “I think Tesla’s addition to the S&P 500 might be a catalyst for a lot of large investors to dump the stock and take gains.”
Elon Musk Gets Richer
Tesla’s stock rally added $15 billion to CEO Elon Musk’s $102.5 billion net worth. He is now the third richest person in the world, elbowing Facebook CEO Mark Zuckerberg’s $102 billion. Musk, 49, increased his wealth by $90 this year alone. Tesla’s wild ride in the stock market resulted in a quadrupling of its value. As such, Musk got the windfall as well.
With fund managers about to buy Tesla shares, Musk’s personal wealth will go even higher. Long time stockholders are also happy with the inclusion, which means they can unload. Roos Gerber, CEO of Gerber Kawasaki, said: “This was a little unexpected happy day for me.” Gerber’s firm holds 130,000 shares worth around $55 million. “It was just kind of mind-blowing that Tesla still wasn’t in the S&P,” Gerber said. “So sure enough, here it is.”
Path to Maturity
Entry into the benchmark is the next step in the maturity of Tesla. As the S&P 500 is one of the biggest indices in the industry, member companies will need to toe the line. Decisions will face more scrutiny, so there is less room for mistakes. With more institutional investors, expect less volatility from day traders and mom-and-pop investors. Like the electric cars it produces, sometimes reliability is better than sexy.
Watch this as Bloomberg Quicktake: Now reports that US electric vehicle giant Tesla will join S&P 500 in December as the largest-ever new member:
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