If you took the $37,990 base price of a Tesla Model 3, and invested it in shares of TSLA a year ago, you’d have more than $281,800 – enough to buy Tesla’s upcoming Roadster with some change left over…
But if Tesla has been a remarkable story in the past year, it’s not because of the insane price appreciation shares have experienced. It’s because the majority of Tesla’s current valuation came from an incredibly predictable phenomenon: inclusion in the S&P 500.
In other words, a massive chunk of the upside in Tesla last year came from information arbitrage, not speculation.
Back in August, we took a look at the unprecedented elements of Tesla’s inclusion in the S&P 500; namely, the fact that there was $11.2 trillion in assets benchmarked to the S&P 500 that would need to immediately make Tesla one of the biggest elements of their portfolios.
The evidence suggested that additional demand for Tesla shares could be as high as a third of the firm’s float.
This was before S&P officially announced Tesla’s inclusion in the S&P.
But the addition was essentially a foregone conclusion.
The S&P folks found themselves between a rock and a hard place, either kicking off a forced buying frenzy by adding Tesla to the index at a concentration never seen before, or making themselves irrelevant by not including one of the ten biggest U.S. equities in an index ostensibly designed to represent the biggest equities.
Back in August, I said that Tesla could hit $3,000 pre-split – a number that admittedly seemed crazy at the time. Turns out, that was a wild underestimate.
Split-adjusted, Tesla is currently just above $4,000 as I write.
So, now that Tesla’s officially represented in indexers’ portfolios, what happens next for Tesla’s stock price?
That’s a harder question to answer.
Now, without the huge tailwind of trillions of dollars of index funds flowing into Tesla, it becomes a speculation again.
A decent data point comes from Research Affiliates, who looked at historical performance of S&P additions and removals since 1970:
The chart suggests that post-add S&P 500 Index constituents tend to trade pretty flat in the 12 months that follows joining (they also note that Apartment Investment and Management (AIV) - Get Apartment Investment & Management Co Class A Report, the stock that got deleted from the index to make room for TSLA could surge double-digits).
One differentiator here is the concentration and momentum of the Tesla position. Tesla is now the fifth-largest component in the S&P 500 index by market cap. We’ve never seen a new add become such a large part of the index immediately after joining, or experience such an insane price surge in the year leading up to inclusion.
(Again, I think that says more about the discretionary factors like earnings quality that the S&P committee considers being a detriment to the index than anything else.)
Still, the only datapoint we have suggests that S&P adds tend to trade very flat after joining the index.
Right now, plenty of Tesla bears are waiting for their opportunity to pounce on a stock that’s overpriced by any valuation metric. If there’s any message from the data at this point, it’s that shorting Tesla continues to be a bad idea.
Buying Tesla may not be an arbitrage trade at this point, but shorting it in the current environment is a far worse idea.