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Tesla's (TSLA) potential inclusion to the S&P 500 was recently explained by noted TSLA bull and Tesla Daily host Rob Maurer. In a recent video, Maurer thoroughly discussed how Tesla could qualify for the index, its possible effects on TSLA stock, and how the electric car maker's inclusion to the S&P 500 could happen.
With Tesla reporting better-than-expected Q2 2020 vehicle deliveries and production figures, and with Elon Musk's optimism and the company's release of its short shorts merchandise, expectations are high that the electric car maker may be on its way to qualifying for the S&P 500. The S&P 500 requires that a company's last four quarters in summation are profitable and that the previous quarter is profitable.
Tesla has posted three profitable quarters so far. The company posted a profit of $143 million in Q3 2019, $105 million in Q4 2019, and $16 million in Q1 2020. If Tesla manages to post even $1 of GAAP profit for Q2 2020, it could meet the S&P 500's requirements. Yet if Tesla does not qualify for the index this quarter, Maurer noted that Tesla could do pursue another attempt at the S&P 500 in the third quarter, a period that will likely be profitable.
What makes the S&P 500 particularly important is that the index is benchmarked by numerous financial firms that manage trillions of dollars worth of funds. These funds tend to purchase shares of companies that are newly part of the S&P 500 because if they don't, they will end up deviating from the index. Tesla's potential inclusion into the S&P 500 then suggests that these funds would have to purchase TSLA stock if the company qualifies for the index.
Using figures from the S&P itself, available data online, TSLA stock's recent price of around $1600 per share, and the electric car maker's float share count, Maurer estimates that the company could have a weight of about 0.91% of the total index. Seeing as the S&P notes that about $11.2 trillion are benchmarked against the index, with indexed assets comprising about $4.6 trillion in total, Tesla's estimated weight of 0.91% would then be worth around 26 million shares at the company's recent stock price.
This was partly noted by Ivan Cajic, head of index & ETF research at Virtu Financial, who told Reuters that index managers would likely need to own 25 million TSLA shares if the company makes it to the S&P 500. Tim Ghriskey, the chief investment strategist at Inverness Counsel in New York, echoed Cajic's statement. "You have all the index funds that have no choice but to include it. That is one reason why it has been so strong here, in anticipation of that," he said.
What is quite interesting is that Tesla is currently not a part of the S&P 400, a midcap index comprised of firms that are not as valuable as those in the S&P 500. Usually, index funds that track the S&P just transfer shares internally when a company transitions from the S&P 400 to the S&P 500. However, since Tesla is not a part of either index, there will likely be a significant number of shares that need to be bought if the company ends up qualifying for the S&P 500.
Tesla is poised to hold its Q2 2020 Earnings Call this July 22. With this, the answer to the question of the EV automaker's inclusion to the S&P 500 would likely be answered. And if Tesla does qualify for the index, a scenario that includes a buying spree from index funds tracking the S&P 500 may very well be feasible.
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Ma. Claribelle Deveza holds zero shares of Tesla, Inc., and currently (at the time of this article's publishing) holds zero options or securities in Tesla Inc. and/or its affiliates.