Tesla to join S&P 500 club in December

It’s finally happening!

S&P Dow Jones indices have announced that Tesla will be included into the prestigious S&P 500 index on December 21st. This is a major achievement for the 17-year-old electric vehicle maker, though it had been roundly expected for a while now. Still, the jubilation over the news sent the stock surging by as much as 15 percent in after-hours trading.

September began in torrid fashion, with Tesla’s shares plummeting by well over 30 percent between August 31st and September 8th amid the broader selloff in US equities. Tesla’s 21 percent drop on September 8th alone was the stock’s largest single-day decline in its history, coming right after news that S&P Dow Jones indices had snubbed the automaker in its last quarterly review.

Despite bouncing off the $330 level and climbing about 23.58 percent since that September 8th low, the stock still found itself being squeezed into a narrowing sideways range. A divided US government is likely to prevent President-elect Joe Biden from pushing ahead with his green agenda, and such curtailed policy-making prospects had been weighing on the EV-maker’s shares. Lately, the stock also had to contend with the ongoing rotation away from tech darlings and into sectors that are more sensitive to the real economy, especially sectors that have been hard hit by Covid-19.

But all that could change with this latest milestone.

Tesla is going to be the biggest-ever addition to the blue-chip index, so much so that S&P Dow Jones indices may have to do it over two separate occasions, as opposed to adding the entirety of Tesla onto the S&P 500 all in one go. After all, the company’s market value has increased by 387.76 percent so far in 2020, and is set to grow even larger when US markets open later today.

From a valuations perspective however, Tesla’s cult-like status is getting way ahead of itself. With a PE ratio of 646.6, Tesla is much more expensive that Amazon, which has a PE ratio of 91.69. For further context, the likes of Apple, Alphabet, and Facebook all have PE ratios that are closer to the Nasdaq 100 index’s PE ratio of 37.43.

Still, there could be plenty more upside from an earnings perspective, keeping in mind that Tesla has just registered its fifth consecutive quarterly profit. Electric cars made up less than three percent of total US auto sales in 2019, hence the company’s decision to build a second US factory in Texas. Tesla also opened a new factory in China earlier this year, with another being built in Germany.

The added production capacity is being cheered on by Tesla bulls, and its inclusion into the S&P 500 may only amplify demand for the stock. That’s likely to be the case for passive funds, who may have to sell between an estimated US$30 billion to US$40 billion worth of other stocks to make way for the Tesla behemoth, given these passive funds’ mandate to mirror the S&P 500.

Inclusion into the S&P 500 can offer additional support for recently-included shares. Etsy, Catalent, and Teradyne have experienced this first-hand, judging by their ability to outperform the broader S&P 500 since the previous quarterly review was announced.

Since US markets closed on September 4th:

• Etsy: +12.12%
• Catalent: +25.5%
• Teradyne: +36.36%
• S&P 500: +5.83%
• Tesla: -2.45%

Tesla has not been able to close above the $500 psychologically-important level in split-adjusted terms following its 5-for-1 stock split on August 31st. Perhaps inclusion into the S&P 500 may just be the catalyst for yet another crowning achievement. Either way, this development surrounding Tesla could have repercussions well beyond the stock itself, and could send waves across the broader US stock market.