TSLA Tesla Inc

By Gunjan Banerji and Michael Wursthorn 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 9, 2020).

Tesla Inc. was passed over for inclusion in the S&P 500 index, a move that put a halt to the parabolic run in the electric-car maker's shares.

S&P Dow Jones Indices, which determines the makeup of the index, said Friday afternoon that online marketplace Etsy Inc., technology firm Teradyne Inc. and pharmaceutical company Catalent Inc. would be added in its quarterly rebalancing. Tesla -- whose shares have catapulted to new highs, partly in anticipation of joining the S&P 500 -- was noticeably absent.

Tesla shares dropped 21% Tuesday, their biggest one-day fall on record. The stock still has nearly quadrupled this year, despite declining 34% in September. Tesla's market value has ballooned to nearly $308 billion, making it one of the biggest companies in the U.S. by that metric.

The announcement is a particularly disappointing development for bullish investors who had aggressively positioned themselves for the company's addition to the gauge. After the company reported its latest quarterly profits and plans to split its stock, many investors bet big that its shares would continue to soar.

They may have gotten ahead of themselves. Tesla appeared to be eligible for inclusion after its latest earnings report. To be considered for the index, companies must report an accumulated profit over four consecutive quarters, including the most recent.

But a mathematical formula alone doesn't decide what is added or deleted from the S&P 500. S&P's methodology for selecting constituent stocks starts with a basic eligibility criteria, including being based in the U.S., where shares trade on a major American exchange. Beyond a few other rules, the S&P 500's makeup is at the discretion of the index committee, which can revise policies for selecting companies and make exceptions to the process.

Shares of companies entering the index usually get a boost around the time they join because more than $11 trillion in investments track the S&P 500, leading to a flurry of potential buying activity.

A spokesman for S&P Dow Jones Indices declined to comment on the index committee's discussions about individual companies. A representative from Tesla didn't immediately respond to a request for comment.

Analysts pointed to a few factors potentially holding the company back, such as its profitability metrics and sales of regulatory credits to other auto makers.

Tesla made more than $1 billion from such regulatory credits over the past four quarters, its financials show. That is more than double its profits over the past four quarters.

"The quality of earnings could be a key issue with the committee," Stephanie Hill, head of index-business and strategy at Mellon, wrote in commentary ahead of S&P's announcement. "Tesla's positive profitability has been driven by the sale of regulatory credits to other auto manufacturers who need offsets in order to reach their emissions standards."

Ms. Hill said volatility in Tesla's shares alongside the sustainability of the company's returns also could play a role. Tesla reported $428 million in revenue from the sale of emissions credits in the most recent quarter, along with net income of $104 million.

The recent announcement doesn't mean Tesla won't join the S&P 500 in the near term. A spokesman for S&P Dow Jones Indices previously told The Wall Street Journal that the eight-person committee can opt to include a new company at any time -- even outside the quarterly rebalancing.

Still, the move highlights how unusual -- and controversial -- Tesla's ascent has been.

The company would be the biggest to ever join the index. As of Friday, Tesla was worth more than nine times the combined value of the three companies that were just inducted, FactSet data show.

On the popular trading app Robinhood alone, the number of users who held shares of Tesla more than doubled to roughly 560,000 from the end of April through early August, according to Robintracks.net. Tesla shares were among the most widely purchased stocks in July on TD Ameritrade's brokerage platform, a first in four months as sentiment for the electric-car maker bubbled.

Charlie McElligott, a managing director at Nomura Securities International, Inc., called the noninclusion a "fresh idiosyncratic pain-point within the Nasdaq/momentum tech trade" in a note to clients Tuesday.

Many investors had piled into short-dated, bullish options tied to continued gains in Tesla stock continued gains, potentially exacerbating its intense rally. Now, those options could be magnifying its spiral lower.

"This matters from a 'knock-on' sentiment perspective with regard to the 'trade from home' speculative frenzy.... creating these hyper-convex 'crash up, crash down' moves," Mr. McElligott wrote.

Tesla is one of the biggest components of the tech-heavy Nasdaq Composite, which fell 4.1% on Tuesday shortly after the opening bell.

--Tim Higgins contributed to this article.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com and Michael Wursthorn at Michael.Wursthorn@wsj.com

(END) Dow Jones Newswires

September 09, 2020 02:47 ET (06:47 GMT)

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