Tesla stock is up 41% since the announcement. Tesla equity is now worth about $543 billion, just shy of
(BRK.A) $547 billion market capitalization.
That means Tesla will likely go into the S&P 500 as the index’s fifth or sixth largest company. And the more valuable it gets, the more shares index funds have to buy. And the more stock index funds have to buy, the higher traders will bid up Tesla shares in anticipation of the massive buying spree.
The S&P 500 is a market-cap-weighted index. The market capitalizations are adjusted by the stock float—the amount of shares available to be traded. When the Telsa index announcement was made, its weighting in the S&P 500 would have been about 1%. With recent gains, that is now closer to 1.3%.
Indexes will be buying $70 billion, give or take, of Tesla stock on or around Dec. 21. More important, they have to buy about 2 million more shares now that Tesla stock gains are outpacing the S&P 500 by such a wide margin.
It’s a positive feedback loop. One potential risk is a price drop after index inclusion, but Tesla stock hasn’t given any indication this year that it will stay down for long. Shares are up about 585% year to date.
Indexation isn’t the only thing driving Tesla higher. Morgan Stanley analyst Adam Jonas upgraded shares to Buy last week. On Wednesday, CFRA analyst Garrett Nelson increased his price target to $650 a share, from $550. It’s the new high price target on Wall Street.
But even Nelson’s increase was tied, in part, to indexation. “We think [Tesla’s] positive momentum is likely to continue in the near term, aided by the robust tailwind of index fund buying,” wrote the analyst. “Importantly, the continuing run-up means that [Tesla’s] cost of capital advantage relative to peers continues to widen, which is critical as the company continues to build new factories.”
He thinks that could be another positive feedback loop for the company. The higher the stock goes, the fewer new shares Tesla would have to issue to build a factory, making growth cheaper. Still, existing investors don’t like any new stock issuance at all.
Tesla stock closed 3.4% higher at $574. The
Dow Jones Industrial Average
fell 0.6% in Wednesday trading.
Write to Al Root at firstname.lastname@example.org