It is my opinion that most people reading this article are already well aware that Tesla Inc. (TSLA) added to the S&P 500 (and S&P 100) Monday morning, before opening. That makes the closing price this Friday night the big one. Oh, at least this Friday is also a rectangular witchcraft awakening event.
As a result of the concept of passive investment, investors who keep an eye on the index – or, in particular, money that monitors the index – will be asked capital already invested elsewhere to buy shares of Tesla. It’s not as easy as you think, just in case you thought it looked simple. Yes, Apartment Investment & Management (AIV) leaves the index, but the two companies are not as big on fair trade. This unfair trade is similar to Nolan Ryan for Jim Fregosi, to put the comparison in basketball terms. FYI, Occidental Petroleum (OXY) will leave the S&P 100.
Moving parts
This is the agreement. Tesla, at its closing of $ 622.77, will run with a market cap of $ 590 billion. That makes Tesla more valuable than Berkshire Hathaway (BRK.A) (BRK.B), a cool $ 524 billion worth. When a company is promoted to membership of the S&P 500 it usually comes in close to the back end of that group. It’s very unusual for a company to come in as the sixth most valuable corporation among the 500. That means Tesla needs a lot of satisfaction. AIV market cap is $ 766 million. In fact, these funds must sell at least a large portion of their holdings in order to properly allocate their money in a way that recognizes index performance.
Expect Tesla at these prices to demand a weight of more than 1.5%, possibly as much as 2% depending on what the stock is doing over the next couple days. Now, not all actions may happen at once, although much of it will happen. Most funds have little chance of trying to get satisfaction right over several days. I’m sure the action has already started and will continue into next week. The problem is not only the very real idea of buying a stockpile of highly volatile stock at the very top of its list after running 644% year to date, but after that the index itself becomes heavier than it already is.
The top five companies in the index already account for 23% on the index. Top 10? 28%. Now enter a new Number 6 and kick out a name near the back of the folder. It would seem to me that the S&P 500 can’t be any more volatile next week, and Tesla itself is likely to have been at a short- and medium-term high once the dust has settled.
These are not very necessary. Tesla will still have the cult, but once the money buys at the top, with a mandate, they will be forced to sell large chunks of shares at rebalancing events from time to time. Imagine a TSLA not trading much lower (or even higher) as these events come and go? If inclusion does not favor Tesla’s volatility, then Tesla’s influence on everything else exposes investors to the risk to the broad market performance (and even economy) that ours has. who govern our own cares for a living have warned them for years.
Tesla Exchange
Regular readers already know that I sold my entire long career at Tesla. I wrote in a piece by myself on December 8th that I had thrown out my entire portion in a pre-opening session that day. My average price that day was running at a foot of $ 636. The idea was to at least buy back some of the shares for trading. I set out my plan in the piece. I bought back a portion of the set just over $ 579. I was going to add it at $ 565. The shares never got there, and I never ran. So I go into the weekend of what is likely to be a good trade, but nothing like the investment I had in the shares over a week ago.
Let me make this clear. I’m 98% sure I’ll sell my Tesla either near Friday or very close. Could the shares go higher next week? They could. Is there a greater risk for small investors interested in this name moving into the first quarter? Absolutely. That is my opinion. I will be ready with this name in less than 30 hours.
Receive an email alert every time I write an article for Real Money. Click on the “+ Follow” next to my byline for this article.