I guess most people who read this article already know that on Monday morning, before the opening, Tesla Inc. (TSLA) will be added to the S&P 500 (and S&P 100). That makes this Friday night’s closing price big. Oh, by the way, this Friday is also an event for witches expiration date …
Under the very concept of passive investment, investors who monitor the index – or, more specifically, the funds that follow the index – will be forced to reallocate capital already invested elsewhere to buy shares. of Tesla. It’s not as easy as you think, just in case you thought it seemed simple. Yes, Apartment Investment & Management (AIV) will leave the index, but the two companies will not change to get a uniform trade. This disproportionate trade follows Nolan Ryan’s line for Jim Fregosi, to put the comparison in terms of baseball. FYI, Occidental Petroleum (OXY) will leave the S&P 100.
Moving parts
This is the deal. Tesla, closing at $ 622.77 on Wednesday, operates with a market capitalization of $ 590 million. This makes Tesla more valuable than Berkshire Hathaway (BRK.A) (BRK.B), worth $ 524 billion. Normally, when a company rises to be a member of the S&P 500, it enters the back of that group. The strangest thing is that a company will become the sixth most valuable corporation of the 500. That means Tesla will need a strong allocation. AIV’s market cap is $ 766 million. Obviously, these funds will have to sell at least a portion of a large number of holdings in order to properly allocate their funds so that they mimic the performance of the index.
Expect Tesla at these prices to require a weighting of more than 1.5%, perhaps up to 2%, depending on what the stock does over the next two days. However, all the action can (not) happen at once, although much of it. Most funds have some leeway to try to get a correct allocation for several days. I’m sure the action is already underway and will continue next week. The problem is not only the idea of the massive forced purchase of an extremely volatile stock at the top of its chart after running 644% to date, but then the index will become the heavier than it already is.
The five largest companies in the index already weigh 23% over the index. The top ten? 28%. Now take out a new number 6 and eject a name on the back of your backpack. It would seem to me that the S&P 500 will only be able to become more volatile next week and that Tesla itself will have reached a peak in the short to medium term once the dust is reached.
They are not necessarily good things. Tesla will still have the cult, but once the funds buy on top, by mandate, they will be forced to sell significant amounts of shares in the event of a periodic rebalancing. Do you think TSLA won’t trade significantly lower (or even higher) as these events come and go? Unless inclusion dominates Tesla’s volatility, the impact of Tesla on everything else will expose passive investment to the danger of broad market performance (and even the economy) that those of us who manage our own portfolios for earning a living we have been warning for years.
Tesla business
Regular readers already know that I have sold my entire long position to Tesla. I wrote in a separate piece on December 8 that I had left all my participation in the pre-opening session that day. My average price that day was $ 636. The idea was to buy at least some of the shares for a business operation. I laid out my plan in the piece. I repurchased a portion of the position just above $ 579. It was going to add up to $ 565. The actions never got there and I did not pursue them. So I go at the end of the week, which will probably be a good trade, but nothing like the investment I had in stocks over a week ago.
Let it be clear. I’m 98% sure I’ll sell my Tesla at the close on Friday or very close. Could stocks rise next week? They could. Is there a significantly higher risk for smaller investors who have an interest in this name for the first quarter? Definitely. This is my opinion. I will plan this name in less than 30 hours.
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