Tesla is an American multinational clean energy company that specializes in the
manufacture of solar panels and battery energy storage. It also designs and builds electric vehicles and related products.
Adding Tesla to the S&P 500 will cost investors more than $45bn
The S&P 500 is a benchmark for US equity fund managers. Its performance is measured against a benchmark of $6.6 trillion in capital. Since 2000, 23 stocks have entered the index. They range from IPOs to financial institutions, including Apple, Google, Facebook, and Netflix.
Tesla is a California-based electric vehicle company. It has reported profit for four consecutive quarters. In Q3 2020, it delivered 139,300 vehicles and recorded a nonGAAP gain of $0.76 per share. During the past year, it has been on the rise, climbing from about $350 to almost $2,000. In December, it finally topped the $1 trillion mark.
The S&P's inclusion of Tesla in its index is a huge deal. It has been long overdue. Prior rating actions have always been delayed by a need to demonstrate continued business performance. A S&P upgrade has always occurred after an earnings call or after a company has shown strong enough financial performance to qualify for a higher rating.
Adding Tesla to the S&P 500 is a big deal, but investors should keep in mind that it will cost them a lot of money. The company's stock price has surged 640 percent in the past 12 months. It was already the seventh largest publicly-traded company in the U.S. before it got into the index, according to research affiliates.
The S&P's upgrade to investment grade was a surprise. However, it makes sense. It means that the company has a track record of making profits, and is a good fit for the index. In a press release, S&P said it had communicated with the company's management. It also said it would buy back some of its shares. This is a smart way to recoup wealth for shareholders.
There are many other factors to consider when evaluating Tesla. Its CEO, Elon Musk, has said he is considering taking the company private. Some analysts are skeptical about his valuation. Other analysts believe that the company will underperform the market. But no matter what you think, you must believe that Elon and his executives can deliver on their targets.
Despite its erratic performance, Tesla has made a profit in each of its last four quarters. It's only a matter of time before it joins the S&P 500. If you are a shareholder, you should feel confident that the company will meet its goals. In addition to the S&P's announcement, Morgan Stanley analyst Adam Jonas upgraded the company's stock from hold to buy. He boosted the price target for the stock from $360 to $540. He predicted a market cap of $1,068 per share if 2.8 million vehicles are sold by 2025.
The S&P's announcement was a big boost to the Nasdaq. Tech stocks have been in a bull run. The market closed at a new high and the Dow Industrials were also up.
Adding Tesla to the S&P 500 could expose portfolios to volatility
The introduction of Tesla to the S&P 500 may mean big changes for the index, the companies in it, and even your own portfolio. While many investors are excited about the company's arrival, it's important to understand the risks involved. One of the first concerns is that Tesla's presence in the S&P 500 will increase the volatility of the index. That's because the company is expected to be one of the 10 most valuable stocks in the index, and the inclusion will add to the level of implied volatility on the S&P 500. That means funds benchmarked to the index will have to decide whether they should purchase shares of the electric car maker, and the result could be huge trading.
Another concern is that if the index includes too much of a company's stock, it can cause large drawdowns during heavy sell-offs. This is especially true for tech stocks, which have high valuations. It's also possible that the addition will force the sale of other names in the index. That's the opposite of the intended effect, but it could happen, especially if other stocks perform badly.
The other concern is the amount of leverage private equity and debt markets have been using in recent years. While these types of markets are growing, they're not very transparent, and that could be bad news for investors. That's because traditional cap-weighted indices have a tendency to buy high and sell low during rebalancings.
There is also the risk that the S&P 500 will become top heavy. That's because Tesla is projected to have a 1% weight on the index, and other companies have been getting a larger percentage of the overall weight. That's going to make the index more volatile, but only for a short period of time.
Finally, the entry of Tesla into the S&P 500 could be the start of a rash of stock selling. It's not uncommon for companies to leave the S&P, and join the S&P 400 Midcap index, or other smaller indices. While this isn't a bad thing, it does cause problems because the S&P is a cap-weighted index, which means that fund managers will have to reallocate capital from other companies in the S&P to buy shares of the newcomer. That could cause large amounts of volatility, especially since the index's market value is relatively small. That's why it's important to avoid too much exposure to the stock market.
While the onset of trading may not occur all at once, there are other factors to consider, including the company's valuation and its volatility. If the company's stock continues to perform well, it will have more impact on the S&P than most other companies, and it will be an event to watch.
However, if the incoming company's stock falls drastically, it will also have a dramatic impact on other stocks. That's because the S&P is a cap-weighted stock index, which means that a large portion of the index's value is held by institutional investors. Those same investors will be forced to rebalance their holdings, and they will want to buy as close to the closing price of the stock as possible.
Adding Tesla to the S&P 500 could be added back in another rebalance
If you own a large amount of shares of Tesla stock, you should be prepared for a dramatic shift in your portfolio. As the world's largest automaker, Tesla will have an impact on a great many assets tied to the benchmark index. It will be among the most valuable companies on the S&P 500 when it joins. It will be one of the 10 biggest additions to the index in recent history.
But this addition is not going to be as easy as you think. It will require a lot of rebalancing. Funds and individual investors will have to sell off other companies in order to make room for the new addition. If the S&P 500 is not rebalanced correctly, the value of the stock could fall by half. This would drag the overall index down by 1%. The amount of trading that will happen is expected to reach a record high. Adding the stock is also likely to reshape Wall Street sentiment, which could affect the sale of shares.
The S&P 500 is a capitalization-weighted index, meaning it is based on the market capitalization of a company. It includes household names such as Microsoft, Amazon, Facebook, and Apple. It is a proxy for the United States economy as a whole. In order to be added to the S&P 500, a company must meet profitability and market capitalization thresholds. The S&P 500 will rebalance in the fourth quarter, and the S&P Dow Jones Indices will decide whether to add the stock or not.
Several companies missed the quarterly rebalance in September, including Tesla. However, the selection committee at S&P Dow Jones Indices may be waiting for the valuation of TSLA's core auto business to decline. If this happens, the stock may be able to be added back in a rebalance later.
But that rebalance is not the only change coming to the S&P 500. The S&P Dow Jones Indices will also be incorporating another company into the benchmark. S&P will likely announce the replacement company near the rebalance date. Depending on how the market reacts to the announcement, the S&P selection committee may also delay the inclusion of Tesla. This delay could be justified if the selection committee believes the company's core automotive business is not profitable.
The S&P 500 is an index of the most popular companies in the United States. It is weighted by daily free-float-adjusted market capitalization. With Tesla's inclusion, the index would be 4% higher. It would also be a more diversified index. The S&P 500 has a tendency to have a few single stocks dominating their sectors. This has led to a larger amount of short-selling. With the inclusion of TSLA, the S&P's short sellers will have less of a chance to profit.
Adding Tesla to the S&P 500 will have a sizeable impact on retirement accounts. It will be one of the most valuable companies in the index, and will be ahead of companies like Apple, Google parent Alphabet, Netflix, Pfizer, and Disney. The S&P 500 is a benchmark that many people use to measure performance in their own portfolios