Tesla, finally profitable, is moving its way into the S&P 500

The stock market has never seen anything like Tesla.

Led by renowned mercurial billionaire Elon Musk, the electric car maker’s shares have risen about 14,000 percent since it went public ten years ago. Even amid a pandemic economy it is up about 700 percent this year.

And now, a company that has undergone years of equally vigorous and critical acclaim among money and tech managers around the world is being added to the S&P 500 – traditionally a hallmark of corporate quality.

Here, too, the stock market has never seen anything like Tesla: On Monday, the company will be the largest number ever added to the index, and, with a market capitalization of $ 650 billion, the sudden pressure it throws into the market could have a strange outcome.

“This is the biggest index entry they’ve ever tried,” said Steve Sosnick, chief strategist at Interactive Brokers in Greenwich, Conn. “The stock will immediately be the top 10 names best in the S&P, which is nuts. ”

Tesla’s fractional value companies would have long been included in the index, but the approach that has made it such a valuable company has presented challenges. Despite its technological innovations, Mr. Musk’s famous billionaire aura and high-risk, high-reward approach to business, Tesla has long been unable to meet the most humdrum requirement in Corporate America: turning a profit. Criteria for inclusion require that the sum of the company’s fully analyzed profits in the most recent four quarters be positive. Tesla only hit that mark this year.

Tesla was never short of ambition, however. From the outset, he advocated competing directly with the world’s largest manufacturers by slowly rolling out a series of electric vehicles at a time when it seemed inconvenient. the technology. General Motors ’electric EV1 had gone the dinosaur route ten years earlier, and Tesla’s plan seemed utterly impractical for a start-up business that wanted to compete with Detroit.

But there was the secret story of Mr Musk, chief executive / man of hype in Apple ‘s Steve Jobs case. It sold a vision that gave Tesla an endless desire for investor money, and pockets of both deep and shallow buys it: Over the years, the company has attracted capital from venture capitalists, bond markets and stock investors, and encouraged a wave of steep investors once it went public.

Even as Tesla struggled to make and sell enough vehicles to keep itself afloat, its stock price was the subject of endless interest and debate. Mr Musk has been joking with skeptics on Twitter – he has often fought against the so-called minutes that promise Tesla shares to fall – and in 2018, he tweeted that he planned to take Tesla privately at a price of $ 420 per share. The following week, he gave an interview to the New York Times in which he admitted that he was cheating, his physical health was suffering and he was trying to achieve the production goals he had set for the company. to achieve, a long-term challenge to the growing company.

There are plenty of good things to say about Tesla as an innovation firm, Chris Mack, stock portfolio manager at investment advisor Harding Loevner in Bridgewater, NJ. But it does not own the shares in its assets, which aim to buy large cap technology companies that have a proven track record of profit, making them suitable for long-term holdings.

“We struggle with quality,” Mr Mack said of Tesla.

But many investors will have no choice about buying Tesla shares.

The S&P 500 is one of the broadest bars of the American stock market, serving as a benchmark against which investors measure investments worth more than $ 11 trillion. Of that, more than $ 4.5 trillion in index money is designed to mirror the stocks in the S&P.

These funds have been buying shares of Tesla since mid-November in preparation for Tesla’s entry into the S&P 500, which has raised its shares by more than 60 percent since it was announced. the company included.

S&P Dow Jones Indices, which owns the index, has considered introducing Tesla to make it easier for index funds to add the shares they need. The expectation that many of the investing public may have to buy a large amount of single stock at the same time may be to incorporate volatility into the price of shares, if it is not liquid enough. But the company decided there would be plenty available to do it all at once.

Because of its size – it’s about $ 100 billion more than Warren Buffett’s Berkshire Hathaway – Tesla will immediately be one of the most influential stocks in the index, aided by market capitalization adjusted for the number of shares available for trading.

Although it is smaller than the largest tech companies – Microsoft, Apple, Amazon, Alphabet and Facebook, which together are worth trillions of dollars and make up more than 20 percent of the index – it is expected to Tesla accounts for about 1.5 percent.

“Tesla is a catcher as far as headlines go, and it will have an impact on prices,” said Howard Silverblatt, senior index analyst for S&P Dow Jones Indices.

And Tesla is moving around a lot.

On Feb. 3, Tesla rose nearly 20 percent on a relatively small update about a joint venture on profit-turning batteries. A few days later, the stock took a 17 percent nosedive when Tesla’s agency said the then-China-based coronavirus revolution would block the delivery of vehicles from its Shanghai plant. . In August alone, Tesla rose nearly 75 percent – held down by strong numbers on vehicle deliveries – just to fall more than 30 percent in the September opening days.

There are various theories as to why Tesla is moving so hard. Financial academics would note the very high valuations that investors place on profits that they expect Tesla to earn in the distant future. Betting on such distant events puts extra pressure on relatively small updates that can, over time, be major changes to the company’s profits. More hard-nosed market watchers point to the army of individual investors who own Tesla shares – and may be more likely to buy and sell on the latest headlines.

Over the past five years, Tesla has been about 60 percent faster than the S&P 500, according to Bloomberg data. And its choppiness has grown to nearly 90 percent more than market volatility this year.

There is reason to believe that Tesla will remain volatile, at least in the short term. Some of the company’s profit this year is due to an investor bet that Tesla would enter the S&P 500 and that the index funds would have to buy.

In a research note this month, analysts at JPMorgan suggested that they believed the price could come down once Tesla was included in the index. They suggested that investors who want to add Tesla should stop buying immediately.

“Tesla shares are in our view and with almost every standard metric are not only valued, but very much so,” they wrote.

But there is reason to believe that Tesla will start behaving a little more confidently.

For decades, academics have studied the behavior of stock added and extracted from major indices such as the S&P 500, finding several notable trends they were eliminating. half the wonder of index inclusion.

Some studies have found that stocks tend to be more similar to the index to which they add, with share prices moving more in a gray phase with the overall index. . That makes sense: Inclusion in the S&P 500 changes the nature of a company’s shareholder base. After Tesla added, about 17 percent of its shares will be owned by investors who own them solely because they are in the index, according to analysis from Morgan Stanley.

These passive investors do not make decisions based on how an individual company is performing. Instead, they buy and sell all 500 stocks in the index as a group, depending on whether money is flowing into or out of their assets. Over time, this can mean that the shares of companies in the index tend to move more as a group.

“As the stock is introduced, the volatility goes down,” said Anna Pavlova, a finance professor at the London School of Business who studied index inclusion. “That’s the biggest impact. ”