Tesla share split and a year of unbelievable gains

It’s not only the tale of a vision, it’s also the story of the pandemic and the rise of the retail trade.

Daily chart: TSLA.O. Black line: 200MA. Blue: 20-EMA. Green: 5-EMA. Source: Metaquotes MT5.

It’s been a stellar run despite the pandemic and the daily chart says it all - Tesla (TSLA.O) and its CEO Elon Musk joining the elite club of pandemic winners alongside the likes of Apple and Amazon. The Tesla boom has propelled Musk to a personal wealth of US $90bn - making him the world’s fourth richest person.

The stock posted a record high closing just below the 2050 handle on Friday ahead of the five-for-one stock split at the end of this week.

Its 2020 performance puts the stock up there with the FAANG stocks - all of which have soared during the pandemic and economic lockdowns. However Tesla is a curious case in this regard as the work-from home fundamentals don’t really support the electric car company like they do the other tech behemoths. So why has Tesla skyrocketed this year?

Of course Tesla is partly a visionary story of a brighter future, easily inspiring investors onboard. But more importantly for the tale of Tesla is the rise of a new retail trade culture this year as people the world over find themselves stuck at home discovering the stock markets. With more participants comes better liquidity and higher prices.

Then comes this week’s five-for-one stock split - something of particular importance to the booming retail culture. Although existing shareholders will be unaffected, the share split will lower the individual stock price, making it more accessible for retail involvement. The most recent rally shows markets trying to price in the news. But is this a buy the rumour and sell the fact scenario? Perhaps - the stock has rallied a massive 50% since the split was announced.

The split will occur after trading on Friday. Next week’s trading will tell all.

Q2 earnings beat and an S&P 500 listing

Late July, Tesla defied Wall Street expectations and posted a 2020 Q2 profit despite plant closures during coronavirus disruptions and remains committed to its goal of 500,000 vehicle deliveries this year. The firm cited lower operational costs, as well as better than expected deliveries. At the end of June, Tesla had delivered just over 179,000 vehicles this year.

The upbeat Q2 report posted the fourth consecutive quarterly profit, the final hurdle qualifying the electric car giant for a prestigious S&P 500 listing.

That S&P 500 (US500) listing is huge news and has only amplified the stock’s incredible 2020 rally. So could this one be another buy the rumour, sell the fact situation? In this case, perhaps not. A listing on the S&P 500 will see demand from institutional funds offering clients a broad return on the wider index. The index is also hugely popular for index funds, which will begin passively purchasing Tesla stock as a result of the listing.

So sure there’s the possibility that it’ll be bid up on the listing as funds snap up an appropriate portion, but equally existing shareholders could see this as a super liquidity opportunity and begin to take some tidy profits after the share’s meteoric rise.

Tesla would be the largest company in dollar terms ever added to the S&P 500 and will be one of the largest stocks on the index.

What tips it all over?

While Tesla might seem unstoppable now, we have to consider the broader fundamentals, beyond a booming retail culture and FOMO trade, that have propped up a collection of aggressive growth stocks. US Treasury yields, often known as the risk-free rate, have moved to historical lows as bonds rally on global economic uncertainties. When adjusted for inflation, the real yields are negative.

With treasury yields as well as bank deposit rates at such low levels, investors are forced to seek return elsewhere. For many, that means the stock market - and in particular the aggressive growth corner. The NAS100 has largely become a bond proxy.

NAS100 (white line) against US 10-year Treasury yields (inverted - purple). The lower yields fall, the higher the NAS100 has traded. Source: Bloomberg.

The risk for these growth juggernauts is that when real rates rise, investors will eye acceptable returns elsewhere and begin rotating out of growth stocks. This would require a bond sell-off though, and there are no convincing signs of this just yet.

Until the fundamentals change, it looks like the retail market is happy to prop up pullbacks.