What Tesla's Addition to the S&P 500 Means for Investors -- Update
November 17 2020 - 4:42PM
Dow Jones News
By Amrith Ramkumar
Tesla Inc. shares rocketed higher Tuesday following news that
the electric-auto maker is joining the S&P 500, increasing the
volatile company's sway over financial markets.
The shares climbed as much as 13% before closing up 8.2% after
index provider S&P Dow Jones Indices said late Monday that the
Silicon Valley car company will be added to the S&P 500 on Dec.
21, replacing a company to be named later. Analysts expect the
addition to further boost Tesla's highflying shares because some
$11 trillion in mutual funds and other investments track the
S&P 500, many of which will now need to buy them.
Tesla's stock has more than quintupled in 2020, giving the
company a market value above $400 billion and positioning it to
debut as one of the 10 largest components in the index. Chief
Executive Elon Musk's company is set to become by far the
most-valuable firm to ever join the S&P 500, according to Dow
Jones Market Data. It is much larger, as measured by market value,
than other auto makers such as Volkswagen AG and General Motors
Co., even though Tesla makes a fraction of the cars that its peers
sell each year.
Analysts had speculated for months that Tesla would get added to
the index after it posted a fourth consecutive quarterly profit
this summer, meeting the main requirement to be added to the
S&P 500. It has been one of the largest U.S. companies by
market value for much of the year, making its omission by the
eight-person index committee of S&P Dow Jones Indices somewhat
unusual.
The company's skeptics worry about its reliance on regulatory
credits to drive earnings and fear that a reversal in its yearslong
stock surge could now help drag down the whole market.
"They're almost turning the S&P 500 into more of a momentum
index," said Benjamin Lau, chief investment officer of Apriem
Advisors, which manages about $850 million and holds a small amount
of Tesla shares.
"I'm more worried about how it affects our index funds and
passive holdings than anything else," he said, adding that they
could now become more volatile.
Unusual Addition
In another sign of Tesla's unique position, S&P Dow Jones
Indices said Monday that it would ask investors whether to add the
company all at once or in two separate tranches. Adding such a
large stock to the index at one time could pose a challenge to
funds that track it because they would likely be forced to sell
billions of dollars of shares in other companies to make room for
Tesla.
The choice to now make the 17-year-old company a pillar of the
stock market will also bolster the influence of a handful of large
companies tied to technology, analysts said.
The five largest tech companies -- Apple Inc., Microsoft Corp.,
Amazon.com Inc., Google parent Alphabet Inc. and Facebook Inc. --
have powered markets higher recently and made up 26% of the S&P
500 at the end of August, up from 14% for the five biggest stocks
in the index three years earlier.
Tesla makes much less money than those companies, but its
addition to that group will now increase attention on its financial
results and the movement of its shares. The company last month
posted a fifth consecutive profit and record quarterly sales
despite the coronavirus pandemic, and its surging valuation has
caused enormous losses for investors who bet against the stock in
recent years.
"It's become so big that they have no choice but to add it,"
said Peter Atwater, a research analyst and an adjunct lecturer at
William & Mary. "I just worry that we're ending up with an
index that's S&P 500 in name only but is really an S&P
10."
Growing Enthusiasm
Even with Tuesday's advance, Tesla shares are still below their
Aug. 31 all-time high, a reminder that excitement about the
company's likely addition to the S&P 500 already helped fuel an
eye-popping rally this summer. Investors also have cheered
Democratic President-elect Joe Biden's recent victory because his
proposed $2 trillion plan to fight climate change includes building
more electric-vehicle charging stations and renewable-energy
infrastructure around the U.S.
Several electric-vehicle startups such as Lordstown Motors Corp.
have gone public in recent months despite having little or no
revenue, highlighting what some analysts call a speculative fervor
surrounding Tesla and its broader sector. The decision to include
Tesla in the S&P 500 now could give bullish investors another
reason to buy the stock. "It validates my investment," said Eric
Perkins, a 44-year-old living outside San Diego who has more than
half of his roughly $1 million portfolio in Tesla shares and drives
a Tesla Model X.
Short-Term Boost?
Despite the excitement, some analysts predict the stock-price
gains tied to the company's inclusion in the S&P 500 could be
short-lived. Stocks joining the index typically get a boost when
they join, but longer-term drivers of share-price performance such
as a company's profit growth tend to take over.
Some investors like Joshua Nash, a 38-year-old technology
consultant who lives west of Vancouver, have already sold Tesla
shares following such a fast run-up.
"I see where they're going, but I feel like they're not quite
there for what they're valued at," said Mr. Nash, who held the
stock for about five years and has a roughly $400,000 portfolio
mostly invested in technology stocks.
Write to Amrith Ramkumar at amrith.ramkumar@wsj.com
(END) Dow Jones Newswires
November 17, 2020 16:27 ET (21:27 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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