Tesla

Tesla hits the big league, but is it a sell on fact?

Chris Weston
Chris Weston
Head of Research
Nov 18, 2020
After much speculation and one failed attempt in the September S&P 500 index rebalancing review, Tesla will enter the world’s most-watched equity benchmark on 21 December.

The question many are asking is now that this bullish catalyst has been realised is whether there’s still juice in the tank and room for the shares to re-test the September highs, or should we sell the fact?

(Tesla daily chart)

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With a current market capitalisation of $418.6 billion, Tesla will go into the S&P 500 as the company with the biggest market cap to ever enter an equity index. It will likely command a weighting north of 1% on the index with around 40% of the free float to be purchased by both passive and active funds, equating to over $100b in institutional buying.

Given the selling of other stocks as funds recalibrate, this could be a spectacle when trading begins on 21 December. In fact, the notional is so great that S&P has set up a consultation on whether to add the stock in two tranches on the close of 11 and 18 December, or just in one tranche on the effective rebalancing date (21 December). One suspects the actual rebalancing will be well managed and not create the levels of volatility in the S&P 500 that some suggest will play out.

It also raises the idea of speculators further front running these future purchases from passive funds. One could argue this has already largely played out and hedge funds were buying in anticipation of this announcement many months ago. It’s this concept that many believe raises the possibility of a buy the rumour, sell the fact type scenario to play out in price.

The current flow suggests short positions are still a tough trade and the fact we’ve seen short interest drop from 33.2% of the free float drop in May 2019 to 6.3% portrays how painful holding longer-term short exposures has been. Until the bid comes out of the stock and momentum shifts to the downside shorting the stock in the current set-up seems a low probability trade.

(Short interest as a percent of the free float)

(Source: Bloomberg)

We all know traditional fundamentals of the business attract a lot of scepticism as to warranting the current lofty share price. A company that records adjusted income of $1.1b, when taking into consideration it received $1.4 in emission credit sales and that has a market cap in excess of GM, Toyota and VW combined, has many questioning the investment case.

However, Tesla is a concept and traditional valuation metrics have been incredibly poor predictors of returns. Arguably for CFD traders, Tesla is a momentum vehicle (excuse the pun) first and foremost and when price starts to move in one direction then it can be a powerful force and the first move is usually not the last move. A closing break of $465 will certainly accelerate the prospect of new highs. On the other hand, if traders start to sell the fact there is a gap to fill into $412.

Tesla has finally made it into the big league, but will this have further positive near-term implications or will this mark the top in the run, as we focus on more value areas of the market?

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