Tesla $3,000? Why S&P Inclusion Adds a Ton of Uncertainty in This Market

Jonas Elmerraji, CMT

More investors are speculating about the possibility that Tesla joins the S&P 500 in 2020.

Yesterday, we took a look at what the S&P 500 would look like Tesla Inc. were added to the big index. 

Today, we’re taking a closer look at what it might mean for shares of Tesla (TSLA) -Get Report.

First things first, there are some differing opinions right now on whether Tesla gets the nod from the S&P at all. S&P Dow Jones Indices actually has a lot of leeway in deciding when to add a new name to the index – and Bloomberg has reported that earnings quality concerns may keep Tesla out longer.

But there’s another angle that S&P is no doubt considering right now – the impact on the index if they don’t.

According to S&P Dow Jones Indices’ data, the S&P 500 (^GSPC) - is currently the benchmark for $11.2 trillion in assets. Already, Tesla’s theoretical 1.06% weight would make it the 11th-biggest name in the index if it were added today.

Tesla’s prospective S&P weight has been increasing dramatically over the course of the year:

TSLA_SPX_weight

Over the course of the last six months or so, Tesla has gone from a relatively perfunctory prospective addition to a nearly unprecedented one in terms of size.

Looking just at S&P 500 passive indexed assets ($4.6 trillion of the $11.2 trillion total), index funds would need to buy $48.76 billion in Tesla shares today to meet their allocation mandates.

The word need is operative here. Passive index funds don’t have the discretion to wait for temporary ebullience in shares to cool before jumping in. They’re obligated to buy.

That alone amounts to about 17% of Tesla’s total float today.

As for the $6.6 trillion or so in benchmarked assets, presumably some chunk of that has the discretionary flexibility to start scaling into Tesla early, or to wait, or even abstain. Although not buying Tesla may be riskier than buying, considering the S&P 500 would be about 4% higher in 2020 if Tesla were added on January 1.

In total, additional demand for Tesla shares could be as high as a third of the firm’s float.

The best recent precedent we have for such a massive S&P add is Berkshire Hathaway (BRK.B) -Get Report, which got added back in 2010 following a split as part of its deal to buy the BNSF Railway. Berkshire’s index weight was almost identical to what Tesla’s would be now.

Even staid, old Berkshire’s impact was dramatic -- it outperformed the S&P 500 by 18% in the month and a half that followed its inclusion in the index. A similar reaction in Tesla puts shares up around $2,360.

But it’s far from a perfect comparison…

One big difference today is that S&P 500 indexed assets are almost 4x larger than they were in 2010, and total benchmarked assets are more than double.

While Tesla is actively traded, its daily trading volume likely overstates its liquidity by a lot.

And that makes the market impact of such an unprecedented buy operation a crapshoot. Could it help fuel a move to $3,000 for Tesla? Sure. It might seem like a crazy price tag, but we're living in Crazytown. And the mere plausibility of that sort of move makes it incredible.

More importantly, it adds a major factor for S&P to consider as it weighs adding Tesla to the S&P 500 in 2020. Waiting might be more reckless for the S&P than just adding it now.

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