I enjoy reading articles and researching outstanding events/news as I write this post. An incredible recovery in the markets from March’s sharp sell-off, where the S&P fell from a high of $3386.15 on February 19th to $2237.40 on March 23rd and to an impressive recovery where it rallied up to $3232.39 on June 8th was a candidate. The high concentration of a few stocks driving the market was very interesting too, but it has been talked about significantly in the past few years. However, what got my interest for this week’s post was the outsized gains in the past 12 months of one of the most controversial stocks on Wall Street: Tesla Inc.
When talking about Tesla, it seems people either hate it or love it. It is also impossible not to discuss Elon Musk, where in most cases if people like him, they like Tesla. And of course, if people dislike him, they dislike Tesla. Some call this the “Musk Cult.” But this post is not about Mr. Musk, rather it is about Tesla. With a market capitalization of over $281B as of July 14th driven by a 327% increase in its stock price since March’s low and with three consecutive quarters posting profits, Tesla is on the verge of two major events that could drive its price even higher.
The chart below shows the last 30 days. Before looking at it, think of the increase in new COVID 19 cases all over the world and the rate at which it is spreading. We are seeing major cities all around the world going back to mandatory lockdowns putting pressure on the possibility of a recovery in the economy. Yet Tesla shows this incredible outperformance.
So what is happening?
First, Tesla will announce earnings on July 22nd and there are big expectations the company will post profits again. If Mr. Musk shows a profitable quarter, it will be the 4th consecutive quarter, a major and final requirement for Tesla to be added to the S&P 500. Investors feeling confident that Tesla will be added to the index are no doubt contributing to its rally. Second, if the electric carmaker were to be added to the index, index funds, mutual funds, ETFs, and actively managed funds that aim to replicate the S&P 500 index, will be forced to buy Tesla. They would want to avoid any errors tracking the index, so they may even start buying before any official announcement. These funds manage trillions of dollars- significantly increasing demand for the company’s stock.
The opposite is also true, if Tesla fails to post profits on the 22nd, the stock could tumble and lose a portion of its recent gains. This is probably another argument for the increased short sellers, who have taken the short interest on Tesla to record levels at over $19B.
We live in an uncertain world. Experts are talking about the risk of inflation and deflation as the pandemic shows few signs of abating anytime soon. Despite Tesla’s quick recovery, investors do not love the rally. Some are looking elsewhere to diversify, some investors are hedging their risk, and still, the stock is near all-time highs. In one week, we will know if Tesla has fulfilled the requirements to be added to the S&P 500 index, recognized as one of the largest companies in the world and part of a select few companies driving the rebound in US equities.