Tesla’s factory in Shanghai. It is the world’s most valuable auto maker by a wide margin.
Hector Retamal/AFP via Getty Images
Tesla stock is rising ahead of a very big day for the stock. Tesla will join the S&P 500 on Monday and its stock price at the end of trading on Friday will determine the weighting Tesla will have in the index.
The S&P 500 is weighted by market capitalization, adjusted for the number of shares available for trading, which for Tesla (ticker: TSLA) is roughly 80%. The rest is held by insiders, including CEO Elon Musk.
Tesla’s current market value is roughly $610 billion. About $490 billion of that is available to trade. And the total market value of the S&P 500 is roughly $32 trillion.
All those numbers work out to about a 1.5% weighting for the Tesla in the index. Tesla is already the most valuable company ever added. At a weighting of 1.5%, it might also become the largest weighting ever added. That title is held by Berkshire Hathaway (BRK.B). Its original weighting in the S&P 500 was roughly 1.4%. Berkshire was added in 2010.
Adding big companies is complicated. The S&P actually considered adding Tesla in two actions—at a smaller weighting, then a full weighting—to help smooth out the impact. But after soliciting responses from fund managers, it decided against it.
The trading impact has been significant. Shares are up about 58% since Nov. 16, when the decision was made by the S&P index committee to include Tesla. The S&P and Dow Jones Industrial Average, for comparison, are up only 3% and 1%, respectively, since then.
Barron’s suggested a 60% gain was too much when speculation initially raged about Tesla’s S&P 500 inclusion, after the company reported a second-quarter profit. We were wrong. Shares have soared more than many pundits expected.
Part of the reason for our skepticism was Tesla’s meteoric rise this year. Shares are up 673% year to date, making it the world’s most valuable auto maker by a wide margin. Toyota Motor (TM) is second with a market capitalization of roughly $250 billion.
Between $5 trillion and $6 trillion are invested in funds indexed to the S&P 500. Those funds start buying Telsa shares on Monday, and they have about 120 million shares to buy. Tesla has traded an average of about 45 million shares a day over the past few days.
There is the potential for a post-index buying drop. How big that might be, just like the pre-index rise, is anyone’s guess.
Tesla shares were up 4.1% to $648 a share late Thursday afternoon. Indexation is likely the dominant factor, but Barclays analyst Brian Johnson took his price target up 84% to $230 from $125. That’s a big increase, but still a long way from $648. Johnson, though, rates shares Sell.
Corrections & amplifications: The market capitalization of the S&P 500 is roughly $32 trillion. An earlier version incorrectly said $3.2 trillion.
Write to Al Root at [email protected]
