By Rowland Goddard
Electric cars, rockets, space travel, renewable energy, neurotechnology – if you have an ambitious idea, pitch it to Elon Musk – but he’s probably already thought of it. Earlier this week, Mr. Ambitious became the second wealthiest person in the world. Although Musk owns multiple companies, his most successful and the one that brings him his riches, is undoubtedly Tesla. They continue to dominate the electric car industry, proving they are still multiple years ahead of other car manufacturers. Earlier this year one of our writers published, 2020: The year of Tesla? and it’s been just that.
Tesla shares (ticker: TSLA) have skyrocketed over the past two weeks, rising roughly $165 per share which equates to a ~39% increase. During this same period, TSLA’s market capitalization surpassed $500B making it the 7th most valuable company in the world. This recent enormous growth is the result of news that Tesla will be added to the S&P 500 index.
The biggest driver for Tesla stock between now and the end of the year will be its addition to the S&P on December 21st. Companies listed on indices like the S&P 500 and Dow Jones are traded with greater volume leading to a higher demand and stock price. This is due to the fact that portfolio managers, both passive and active, now have a huge incentive to trade TSLA – even if they aren’t big on the stock. Once TSLA officially joins the S&P, these portfolio managers will be forced to compare their growth to Tesla’s. Therefore, it would be in their best interest to have TSLA a part of their own portfolio.
Similar to an investment portfolio, each company in the S&P 500 has its own weighting based on its market capitalization. Companies with larger market caps will have greater weighting and vice-versa. Apple (ticker: APPL), currently the most valuable company in the world has the largest weighting at 7.1%. Although not official yet, based on Tesla’s current market cap, estimates suggest that a weighting between 1-1.5% is likely.
This is great news for TSLA holders with a bullish position as share prices will continue to grow leading up to its addition on December 21st. Current shareholders know that managers tracking the S&P 500 will need to buy shares of TSLA in substantial quantities on or before its addition date.
Portfolio managers who think Tesla will underperform will likely weigh TSLA in their funds at 1%. Why? Should Tesla overperform or perform adequately, the S&P 500 will have better growth than that of the portfolio managers fund – so they need some of TSLA shares as insurance (or hedge).
Fund managers who have a bullish outlook on Tesla will weigh TSLA at 1.5% or greater. They want to outperform the index in the case Tesla continues to grow. Finally, where most of the buying will come from is those managers who want to match the S&P 500 index. They will weigh TSLA at 1.5%, meaning movement in Tesla stock will not affect their funds’ comparison to the index.
This will result in hundreds of billions of dollars worth of trading being put into Tesla. At least for now, the only way is up for Tesla. Once the buying calms we may see a price adjustment as investors could believe the stock is overvalued. Proceed with caution if you are planning on jumping on the Tesla rocket.