A Tesla car sits parked at a Tesla Supercharger on September 23, 2020 in Petaluma, California.
Justin Sullivan/Getty ImagesIt took months, but Tesla will finally enter the S&P 500 Index, solidifying its position as one of the world’s leading auto makers. Shares are up almost $45, or 11%, in after hours trading. The question for investors and traders now: Where will the stock go from here?
The S&P 500 index committee announced Tesla’s (ticker: TSLA) inclusion Monday evening, and the stock will officially enter the index on Dec. 21. Bullish Tesla investors were expecting inclusion eventually, but the timing was up in the air. Monday’s announcement counts as a positive surprise for Tesla bulls.
The positive surprise comes after a September disappointment. Tesla qualified for S&P inclusion after reporting a profitable second quarter. That gave the company GAAP, short for generally accepted accounting principals, profits over the prior 12 months as well as profits in its most recently reported quarter.
But the S&P 500 Index committee doesn’t automatically include companies and passed on Tesla when announcing third quarter rebalancing actions shortly after Tesla reported second quarter numbers.
That was early September, when Tesla shares were trading at $418. Shares hit $330 the Tuesday following the indexation disappointment, but recovered all the loss in five days. Tesla stock hit $330 Tuesday—Monday was Labor Day. Tuesday was the first trading day after the S&P announced its quarterly rebalancing plans.
Tesla reported another GAAP profit for the third quarter, meaning it still qualified for index inclusion. Now Tesla will be in. Investors have to assess what kind of price action they can expect in coming weeks.
Tesla bulls argue indexation created more demand for the stock. There are, after all, roughly $12 trillion in mutual fund assets indexed to the S&P 500. Very roughly, $100 billion in Tesla stock has to be bought by index funds. That does mean elevated demand for a few trading days. But other market pundits argue any price bump from indexation is temporary. After index funds buy, trading volumes return to normal.
Figuring out exactly what will happen is hard. The stock set up is completely different this time. Tesla shares rose 74% in August following second quarter numbers and S&P indexation fervor. Shares dropped 14% in September.
Coming into the S&P decision Monday, Tesla stock looks stuck. Shares are down about 7% over the past month, as of Monday’s closing price. The Dow Jones Industrial Average is up almost 5% over the same span. What’s more, shares are about 18% below their $502.49 52-week high set on Sept. 1—right around the time of peak indexation fervor.
Traders might expect Tesla stock to retest its 52-week high. There are other data points to look at to estimate near term trading levels. Back in September, the top analyst price target from a large brokerage was $500, from Jefferies analyst Philippe Jean Houchois. Now, the top analyst target price is $578 from New Street Research analyst Pierre Ferragu.
That’s another way to estimate how high Tesla can trade. Both $502 and $578, however, are only suggestions and not tied to EV or auto industry fundamentals. There is no reason any stock has to hit a top analyst target price, but traders will always look for clues about the near future.
When it goes in, Tesla will enter the Index as the world’s most valuable car maker. What’s more, it should be the ninth or 10th most valuable company in the S&P 500, trailing behind Walmart (WMT) or Visa (V).
Ford Motor (F) and General Motors (GM) are the other two auto makers in the S&P 500.
Year to date, Tesla stock is up about 390%, as of Monday’s closing price.
Write to Al Root at allen.root@dowjones.com
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