The Best Tesla Stock Rises Again
Tesla shares simply won’t go down, and that’s creating a new problem for index funds.
Tesla shares (ticker: TSLA) rose for the third day in a row and the sixth time in seven trading days after the S & P index committee announced that Tesla would enter the S & P 500 in December. 21.
Tesla shares have risen 41% since the announcement. Tesla’s capital is now worth around $ 543 billion, just below that of Berkshire Hathaway (BRK.A) market capitalization of $ 547 billion.
That means Tesla will likely enter the S & P 500 as the fifth or sixth largest company on the index. And the more valuable it becomes, the more stocks have to buy index funds. And the more stock index funds have to buy, the higher traders will offer Tesla shares in anticipation of the massive buying spree.
The S & P 500 is a market capitalization-weighted index. Market capitalizations are adjusted by stock flotation, the number of shares available to be traded. When the Telsa index announcement was made, its weighting in the S & P 500 would have been about 1%. With recent gains, it is now closer to 1.3%.
The indices will buy Tesla 70 billion, give or take, of Tesla shares in or around December. 21. More importantly, they have to buy about 2 million more shares now that Tesla’s stock gains are outperforming the S & P 500 by such a wide margin.
It’s a positive feedback loop. One potential risk is a price drop after the index’s inclusion, but Tesla shares have given no indication this year that it will stay low for long. Shares have risen about 585% year to date.
Indexing is not the only thing that drives Tesla higher. Morgan Stanley analyst Adam Jonas upgraded the shares to Buy last week. On Wednesday, CFRA analyst Garrett Nelson raised his price target to $ 650 per share, from $ 550. It is the new high price target on Wall Street.
But even Nelson’s rise was tied, in part, to indexing. “We believe [Tesla’s] positive momentum is likely to continue in the near term, helped by the robust tail wind of index fund buying,” the analyst wrote. “Importantly, the continued increase means that [Tesla’s] cost of capital advantage relative to its peers continues to expand, which is critical as the company continues to build new factories.”
He thinks it could be another positive feedback loop for the company. The larger the stock, the fewer new shares Tesla would have to issue to build a factory, which makes growth cheaper. Still, existing investors do not like any new stock issues at all.
Tesla shares closed 3.4% higher at.574. The Dow Jones Industrial Average fell 0.6% in Wednesday trading.