Tesla S&P 500 Inclusion
Why this is a big deal for the most valuable automaker
Tesla Inc. (NASD:TSLA) will be added to the S&P 500 prior to the open of trading on December 21st to coincide with the December quarterly rebalance. Tesla is the highest valued company to ever be added to the index at a $460B market cap and will have an approximate 1.3% weighting in the index. The inclusion follows months of speculation and a temporary setback when Tesla was snubbed during the previous quarterly rebalance in September despite meeting all of the necessary requirements. The requirements for S&P 500 inclusion are as follows:
Candidate Must be a US company
Market cap must exceed that of the least valuable company in the index
Public float must consist of at least 50% of the outstanding shares
Candidate must report positive earnings in the previous four quarters
Stock must have an active market and must trade at a reasonable price
Typically, a small to mid cap company is added to the index when it meets this criteria. The least valuable company in the index is simultaneously taken out to make room as the index is supposed to represent the top 500 companies in the US. Due to the outstanding performance of the index, it is tracked by many large mutual funds and hedge funds. When a company is taken out of the index, these funds will sell the stock and when a company is added they typically buy the same weight-adjusted amount of stock. The same is true for Tesla, but since weighting in the S&P 500 is ordered by market cap, Tesla will likely be the 8th largest company in the index with an approximate 1.3% weighting as soon as it is added. Instead of being added near the bottom like most companies, they will be added as a mega cap stock near the top of the index, giving them the sizeable weighting. This means that large funds will have to buy huge amounts of Tesla stock to ensure it makes up 1.3% of their portfolio in order to accurately track the S&P 500.
The stock is up nearly 20% since the announcement of inclusion as retail investors try to get shares before they are bought up by large corporate entities that are now required to buy the stock in December when it is officially added to the index. Since a company of this size has never been added to the index before, the S&P Dow Jones Indices is turning to investors to determine exactly how the company should be added:
“Due to the large size of the addition, S&P Dow Jones Indices is seeking feedback through a consultation to the investment community to determine if Tesla should be added all at once on the rebalance effective date or in two separate tranches ending on the rebalance effective date. Tesla will replace a S&P 500 company to be named in a separate press release closer to the rebalance effective date.”
Being added to one of the worlds most famous stock indexes is a huge step towards blue-chip status for Tesla. Although it is honourable to be added to this benchmark, it changes nothing about the fundamental business which will be the real driving force for the company’s stock price and future growth.