I suspect most people reading this article already know that on Monday morning, prior to the opening, Tesla Inc. (TSLA) is added to the S&P 500 (and S&P 100). That makes the closing price of this Friday evening the big one. Oh, by the way, this Friday is also a fourfold witch maturity date.
Under the concept of passive investing, investors tracking the index – or more specifically funds tracking the index – will be forced to reallocate capital already invested elsewhere to buy Tesla shares. It’s not as easy as you think, in case you thought it sounded simple. Yes, Apartment Investment & Management (AIV) is leaving the index, but the two companies are not keeping pace. This disproportionate swap is along the lines of Nolan Ryan for Jim Fregosi, to put the equation in baseball terms. FYI: Occidental Petroleum (OXY) is exiting S&P 100.
This is the deal. Tesla, which closes at $ 622.77 on Wednesday, has a market cap of $ 590 billion. That makes Tesla more valuable than Berkshire Hathaway (BRK.A) (BRK.B), worth a whopping $ 524 billion. When a company is elevated to membership in the S&P 500, it usually enters the back of that group. It is highly unusual for a company to come in as the sixth most valuable company of the 500. That means Tesla needs a hefty allocation. The AIV’s market capitalization is $ 766 million. Obviously, these funds will have to sell at least some of a large number of their holdings in order to allocate their funds properly to mimic index performance.
At these prices, expect Tesla to require a weighting of more than 1.5%, perhaps as much as 2%, depending on what the stock does in the next few days. Now not all of the action can (will) take place at once, although much of it will. Most funds have some leeway to get a correct allocation in a few days. I’m sure the action is already underway and will continue until next week. The problem is not only the idea of a massive forced purchase of an extremely volatile stock at the very top of the chart after an annual turnover of 644% so far, but that after that the index itself will become heavier than it already is.
The top five largest companies in the index already weigh 23% on the index. The top 10? 28%. Now you bring in a new number 6 and kick a name close to the back of the package. It seems to me that the S&P 500 could only get more volatile next week, and Tesla itself will likely have reached a short to medium peak once the dust settles.
These are not necessarily good things. Tesla will still have the cult, but once the funds buy at the top, on mandate, they will be forced to sell significant amounts of stock at periodic equilibrium events. Do you think that TSLA will not trade significantly lower (or even higher) if these events come and go? Unless inclusion tames Tesla’s volatility, Tesla’s impact on all other passive investments will expose you to the peril of the broad market (and even the economy) performance that those of us managing our own portfolios have been warning about for years. .
Regular readers already know that I sold my entire long position in Tesla. I wrote in a standalone piece on December 8 that I ditched my entire stake in that day’s pre-opening session. My average price that day ran with a handle of $ 636. The idea was to buy back at least some of the stock for a trade. I put my plan in the piece. I bought back part of the position just above $ 579. I would add $ 565. The shares never got there and I didn’t hunt. So I’m going into the end of the week, which will probably be a good trade, but nothing beats the investment I had in the stock over a week ago.
Let me make this clear. I am 98% confident that I will sell my Tesla by Friday’s close or close by. Will stocks get higher next week? They could. Is there a significantly increased risk for small investors with an interest in this name entering the first quarter? Surely. That’s my opinion. I’ll have this name flat in less than 30 hours.
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