Risky Tesla’s entry into the S&P 500 might not be a clean trip for the change

People wearing face masks are seen in a Tesla showroom at a mall in Wuhan, Hubei province, the epicenter of the Chinese coronavirus disease (COVID-19) outbreak on March 30, 2020.

Aly Song | Reuters

Tesla’s entry into the S&P 500 could be anything but a smooth ride, and it will likely put temporary pressure on other stocks in the index.

Investors are already playing how its entry could affect the S&P 500, adding to volatility and forcing other names in the index to be sold as investors and funds that need to own the full index make room for Tesla.

The volatile stock has an unusually high market cap for a new member of the index – about $ 465 billion as of Wednesday, if founder Elon Musk’s 20 percent stake is not factored in. With 17% of the S & P’s value in the hands of index investors, that means $ 80 billion worth of Tesla needs to be bought, according to Howard Silverblatt, senior index analyst at S & P Dow Jones Indices.

“Because market capitalization is so huge and the amount of dollars it takes for the index people to buy is so large, there are a lot of stocks for sale in the other 499 names of the S&P,” said Peter Boockvar. Chief Investment Strategist at the Bleakley Advisory Group.

S&P Dow Jones Indices is expected to announce the stock, which will be removed to make way for Tesla Friday after market close, and Tesla will officially trade as a member of the S&P 500 on December 21st.

Tesla joins the S&P at the closing price next Friday, a day that is expected to be already volatile as it’s also four times the expiry of the quarterly options.

“The 18th is when all the action happens,” said Silverblatt. However, he noted that investors other than the indexers previously could add Tesla and trade the other names in the index.

The addition of Tesla will mark the biggest realignment of the S&P 500 ever. Silverblatt said Tesla could do more trading than many other names added to the index simply because it was not included in the S&P 1500 as a member of the S&P 400 midcap or S&P 600 small cap indices.

Companies exiting the S&P 500 will often join the S&P 400 midcap index, and many companies are moving from the midcap index to the S&P 500 as they grow, Silverblatt said.

“If a company comes out that is not in 1500, it will be hit harder. More institutions will have to buy them. They are in the index for all US stocks, but usually not in the S&P small cap or mid cap,” said Silver leaf.

Silverblatt said Tesla could be similar to the experience with Yahoo when it was added. It was not a member of an S&P small or midcap index, and the institutions generated a great deal of buying interest. Yahoo shares rose 50% between the announcement and entry into the index, he said.

Fund managers who need to buy the index will try to buy Tesla as close to the December 18 closing price as possible. “It will likely be one of the largest tight buy markets ever,” said Boockvar.

“I think the weighting will be 1.5% for the current market capitalization. The name it replaces is likely to have a lower allocation, so Tesla will have to take a small chunk from the other 499,” said Boockvar. Tesla is big, but still small compared to Apple, which is 6.4% of the S&P value, or Microsoft, which is 5.3%

Silverblatt said Tesla is the seventh largest company in the S&P by market cap after Apple, Microsoft, Amazon, Facebook, and Alphabet’s A and C shares. It’s right outside Berkshire Hathaway.

Boockvar noted that Tesla is already up 15% since it was announced for inclusion in the S&P on Nov. 16, and that it hit a trading range of $ 60, or 10%, on Thursday alone. The company also announced this week that it will raise up to $ 5 billion on a two-share offering, the second in three months.

“Usually the company’s market cap isn’t even close to that. Usually it’s a few billion market cap. It’s rare for a nine-figure company with a market cap to get into the S&P with a smaller market cap. This has the potential to be much more volatile.” said Boockvar.

Tesla could continue to add volatility to the index once it becomes a member.

“It’s a wild fish in a large pond,” said Paul Hickey, co-founder of Bespoke. “It won’t change everything, but if you look carefully you will notice it. If you just drive past the pond you won’t notice it, but if you look below the surface of the pond you will notice I’m going to get this one crazy.” See fish down there. “

Hickey said he expected some selling pressure on the other S&P names temporarily before Tesla joined. Regarding the stock, which will leave the S&P to make way for Tesla, he said the departing companies had mixed performances.

However, he noted that of the 15 stocks that have joined the S&P 500 so far this year, most have outperformed the S&P since they were added. Only four have left the S&P index behind since joining, and only one, DexCom, has been lower since it was added.

Carrier Global has had the best new additions this year, up more than 120% and outperforming the S&P by more than 75% since its April 3rd launch.

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