TSLA in S&P500: Good news for investors?

How can Tesla (TSLA) join the S&P500 and how will it affect the stock price? What can we as an individual investor benefit from this special occasion?

I’m going to try my best to explain what’s going on with TSLA. No doubt many people are thinking this volatility is unreal and this stock is in a bubble.

Last month we were at around $1,000. At that time, my thought was that if TSLA made even this quarter, all hell will break loose and that my target post P&D is $1,200. It quickly blew past that.

Tesla is a big company, with a cap of more than $300B. It is around the 10th largest company in the US. The SP 500 supposedly comprises of 500 largest companies in the US.

Yet, TSLA is not part of the index. Why? Because it satisfies most of the requirements such as revenue and domicile, except 1, which is profitable 4 consecutive quarters. TSLA was profitable in Q3 2019, Q4 2019, and Q1 2020. If this time it is profitable again, it will join the SP 500. Why is this significant?

1. SP 500 and why it is good for Tesla:

SP 500 is the most popular stock index with more than $4 trillion under the management of index funds such as VOO and SPY. Index funds are passively managed funds that mimic the composition of the SP 500 index.

They don’t make judgment as to which companies to buy. They automatically buy ALL of the stock on the index(505 to be exact).

That means the moment TSLA is declared a component of the index, about $80 billion will be used to buy TSLA. This in and of itself drives up the stock price significantly.

However, history has shown that stock prices don’t move after they join the index. That is because the market knows when a company qualifies for the index before an official announcement is made.

In the case of TSLA, the market has been waiting for a profitable Q2. That’s the last nail in the coffin to send TSLA bears to their eternal resting place. Technically, TSLA has not reported Q2 earnings yet, but its Q2 delivery number was very good, over 90k cars. It took them only 88k to post a profit in Q1. Coupled with various hints from Musk and Tesla, that delivery number has all but guaranteed a profit with earnings 9 days away and SP 500’s official announcement at least a month away. Therefore, most of the buying is done BEFORE the announcement.

So imagine this: you know that index funds will be required to buy a ton of shares regardless of the price but they won’t be buying for at least another month.

2. What do you do at this time?

You, as a trader, will go in and buy TSLA to sell it back to SPY, right?

If you’re a fund that mimics SPY, you will want to go in and buy before SPY does, right?

If you’re Vanguard, you want to go in and buy TSLA to sell back to your own index funds (VOO, VFINX), right?

So, we have all these forces vying for TSLA and they have over a month to play. The result is violent upward movement for the last 2 weeks on “no news”.

3. General view on TSLA right now!

TSLA is going through a period of “re-pricing” or “re-discovery.” What does it mean?

It means TSLA has proven to the market that it is thriving during COVID despite not being a “COVID stock.” It has more than 30k employees working in factories and its products are deemed high ticket items, exactly the things people say they don’t want to buy in a recession.

Despite all that, it is beating Wall Street estimates by a miles. So, the market is having to re-assess the company’s outlook and come to terms with the fact that it is a tech juggernaut.

With SP 500 inclusion on the horizon, the narrative about TSLA as a speculative stock is dead and so suddenly nobody knows how much TSLA’s worth.

We have the stock doing nothing from 2014 to 2019 which makes it even harder to re-price. This is called a long base. The longer the base, the more violently a stock breaks out when it breaks out.

Normally we have stock price following a “/” shape of which each point serves as an anchor to price in the next development. A stock was $10; now it just made 10% more income and is worth $11. That’s easy, right?

In TSLA’s case, the company has got many many times stronger since 2014 and yet its price didn’t do anything for 5 years.

Suddenly it began to post profits quarter after quarter and Wall Street is losing its mind because it’s got no price anchor. So now we are in re-pricing mode where people buy and sell without regard to historical prices. They just going to keep buying and selling until buyers and sellers are happy with the price.

4. Future outlook for TSLA:

Anyone saying TSLA is in a bubble is basically saying they know what the stock should be trading at. That’s incorrect.

I’ve made so damn much money on this stock and I don’t know what price it should be trading at. People making tens of millions on TSLA don’t have a price target. So people making a few hundreds here and there should just sit down and be quiet.

As if re-pricing is not chaotic enough, we are throwing SP 500 inclusion into the mix and it’s getting crazy. It may go to $2,000 or even $3,000 before consolidating in the $1,500.

Nobody knows but I know this: it will get much much higher in the long run, much higher than $3k.

Volatility is not a risk. Ignorance is. The market loves volatility because if it controls the volatility, it can suck in FOMO (Fear of Missing Out) buyers and spit them out penniless without any impact on the long term stock price.

If you’re holding, strap yourself in and enjoy the ride. Given the same elements, it can happen with any other stock.