Tesla appears on the verge of joining the S&P 500, a major accomplishment for Chief Executive Officer Elon Musk that would unleash a flood of new demand for the electric car maker’s shares, which have already surged 500 per cent over the past year.
Higher-than-expected second-quarter vehicle deliveries, announced last week, have analysts increasingly confident the company will show a profit in its quarterly report on July 22. That would mark Tesla’s first cumulative four-quarter profit, a key hurdle to be added to the S&P 500.
With a market capitalization of about $250 billion, Tesla would be among the most valuable companies ever added to the S&P 500, larger than 95 per cent of the index’s existing components. It would have a major impact on investment funds that track the index.
While analysts and investors have recently become more confident of Tesla’s addition, an S&P Dow Jones spokeswoman declined to comment about specific changes to the index.
Funds that attempt to identically track the S&P 500 have at least $4.4 trillion of assets, according to S&P Dow Jones, and those funds would need to buy Tesla shares quickly to avoid errors tracking the index’s performance.
Additionally, actively managed investment funds that benchmark their performance to the S&P 500 will be forced to decide whether to buy Tesla shares. Such funds manage trillions of dollars in additional assets.
“Even if you don’t like Tesla and you think it’s overvalued, the fact that it is going into the index would mean trillions of dollars would have some kind of position,” said Jim Bianco, head of Bianco Research in Chicago. “As part of their benchmark, portfolio managers would not be able to ignore it.”
Up 43 per cent in just the past eight sessions, Tesla is among the most loved – and hated – stocks on Wall Street. It is the U.S. stock market’s purest play bet on the rise of renewable energy and the decline of fossil fuels, and Tesla’s Model 3 sedan has made major inroads among consumers.
However, short sellers are betting $19 billion that Tesla’s shares will fall, the largest short level on record for a U.S. company, in dollars, according to S3 Partners.
Bears point to looming competition from Porsche, General Motors and other longer-established rivals. They are also skeptical of Tesla’s corporate governance under Musk, who in 2018 agreed to pay $20 million and step down as chairman to settle fraud charges.
Traders betting Tesla could be added to the S&P 500 have almost certainly contributed to the recent rally. However, Bianco warned that the stock could reverse if Tesla is not added to the S&P 500.