Tesla shares record hits after last-minute spike prior to S&P 500 debut

Tesla shares rose in the morning before slipping in afternoon trading and trading in and out of the red for the past hour. They finished at $ 39.10, or 6% to $ 695, a closing record – about $ 40 a share above their last trade in the moments before the market close auction on Nasdaq. Traders had said the company’s addition to the broad index increased the possibility of an epic squeeze as index funds rushed to buy stocks.

Investors who followed it up and down during the latter part of the trading day suffered “a bit of a whiplash there,” said Mike Bailey, a research director at FBB Capital Partners.

“It was definitely a little choppy there for the past hour,” Mr. Bailey said.

Tesla’s rise has become a landmark chapter in a notable year for stocks. The company, led by a charismatic and sometimes erratic chief executive, Elon Musk, has benefited immensely from investors’ embrace of top tech companies following the introduction of government and central bank stimulus programs to mitigate the coronavirus pandemic. The company’s attractive cars, improved finances and soaring stock price have created a strong following among investors.

“It’s the best car I’ve ever driven,” said Eric Mandela, a 38-year-old individual investor who has owned the stock since 2014. “The first time I drove it, I felt the same as when I first used the iPhone.”

He plans to hold his Tesla stock for the long term.

At the same time, many analysts warn that Tesla stocks are vulnerable to a significant drop after their sevenfold rise this year, a rise that skeptics say has not been accompanied by similar increases in the company’s financial results. The company’s inclusion in the most followed market index could weigh on returns for retirement savers and other risk-averse investors, who are generally less likely to buy the stock directly, investors said.

Even those who say they plan to hold the stock for the long term, confident that the company will remain a strong investment, brace themselves for the coming volatility.

“I have a hard time with that, the share price,” said Brooke de Boutray, portfolio manager at Zevenbergen Capital Investments LLC, which has approximately $ 600 million in shares. She remains optimistic about stocks, but said Tesla’s years of surge could put pressure on returns in the coming months.

Tesla’s profits have reached new heights in recent days. Since Nov. 16, when S&P Dow Jones Indices said it would be added to the meter, Tesla has added approximately $ 272 billion in market value, more than Toyota’s full market cap.

The closing auction, held at 4 p.m. EST and setting end-of-day prices for thousands of stocks, has become increasingly important in recent years as more money has been stacked in passive investments. At 3:50 PM, exchange operator Nasdaq Inc., which lists Tesla stock, began sending information about order imbalances ahead of the close bell, showing there was more demand to buy than sell the stock, traders said. That drove Tesla’s price up sharply as traders began to respond to those signals.

According to Dow Jones Market Data, Tesla won $ 33.09 or 5% in the last 10 minutes of trading. About 1.7 billion shares worth more than $ 150 billion were traded in seconds at the Nasdaq auction, the highest amount ever.

Even before the closing clock, traders flocked to the options market to bet on bigger gains in Tesla stock, sending volumes to a record high. Some of the most active bets were bullish calls pegged to the stock climbing to $ 700 or even $ 740. Trade Alert data shows that for options that expire the same day, a sign many positioned that the stock would shoot higher within hours.

Some traders and investors have said they are ready to let some of the excitement around Tesla stock subside in the coming days, which will lead to a price drop. That would follow with what often happens in such cases, said Ilya Feygin, a director at WallachBeth Capital.

“Such growth stocks typically rise a lot before they are taken up and then underperform after withdrawal,” said Mr. Feygin.

He pointed to Amgen Inc.,

which is up about 7.5% from the time the recording went public and the actual addition to the Dow Jones Industrial Average in August. Shares have since fallen about 10%.

Rob Arnott, chairman of investment firm Research Affiliates, argues that Tesla meets the classic definition of a bubble, leaving index investors potentially vulnerable to a downturn in the electric car maker’s stock, while lacking the benefits of the recent rebound.

Tesla’s eight-fold rise in the stock price since its March low meets the two-part definition of a bubble set by Mr. earnings multiples and other conventional investment statistics.

“Bubbles almost always burst,” said Mr. Arnott, suggesting that next week could be the start of Tesla’s turnaround.

Tesla wouldn’t be the first major S&P 500 addition to hit sharp sales. For example, Yahoo’s market cap peaked less than a month after it joined the S&P 500 in December 1999, while Qwest Communications’ valuation peaked on the same day it was added to the index in July 2000.

Shares of Facebook Inc.,

meanwhile also rose after S&P said it would add the social network to the broad benchmark, up 17% over the eight-day period between its announcement and its 2013 inclusion. Facebook shares fell 6% the following month as the zeal of the investors declined. The S&P 500 fell only 2% over the same period.

Short sellers, who borrow and sell stocks in an effort to make a profit by later buying them back at lower prices and pocket the difference, have started betting against the company again in recent weeks. Bearish investors shorted nearly 50 million Tesla shares on Thursday, about three million more than short sellers at the end of November, according to data from S3 Partners. Those bets represent approximately $ 32.6 billion in Tesla stock, making it the largest short position in the stock market.

About two-thirds of analysts following Tesla have a sell or hold on the stock, with price targets averaging about $ 416 per share – a 40% discount until Friday’s close. One of the most bearish is Ryan Brinkman, JPMorgan Chase & Co. analyst, who set a target of $ 90 on Tesla earlier this month.

Still, the gains have made such prudence seem silly to supporters in the past, and many expect it to continue.

“I’m just so excited about the future of this,” said Jason DeBolt, a 39-year-old software engineer in Los Angeles who bought his first stock in Tesla in 2013 after buying a Model S. $ 8 million since then, making Tesla by far his largest investment.

“I am not willing to let go of stocks,” he added.

Write to Gunjan Banerji at [email protected] and Michael Wursthorn at [email protected]