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- The S&P 500
-What is the S&P 500?
-How to get included in the S&P 500
-What happens when a new stock is included in the S&P 500
-S&P 500 quarterly rebalancing
- S&P 500 Inclusion Case Studies
- TSLA's S&P 500 Inclusion
-The big factors in play during TSLA's S&P 500 inclusion
-Simplifying S&P 500 inclusion to a supply & demand issue
-An estimation of the make-up of TSLA shareholders
-TSLA post-inclusion stock price prediction
1: The S&P 500
What is the S&P 500?
The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities. There is over 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately 80% of available market capitalization.
The index is one of the factors in computation of the Conference Board leading Economic Index, used to forecast the direction of the economy.
How to get included in the S&P 500
Universe. All constituents must be U.S. companies.
Eligibility Market Cap. To be included, companies must have an unadjusted market cap of USD 8.2 billion or greater.
Public Float. Companies must have a float market cap of at least USD 4.1 billion.
Financial Viability. Companies must have positive as-reported earnings over the most recent quarter, as well as over the most recent four quarters (summed together).
Adequate Liquidity and Reasonable Price. Using composite pricing and volume, the ratio of annual dollar value traded (defined as average closing price over the period multiplied by historical volume) to float-adjusted market capitalization should be at least 1.00, and the stock should trade a minimum of 250,000 shares in each of the six months leading up to the evaluation date.
Sector Representation. Sector balance, as measured by a comparison of each GICS sector's weight in an index with its weight in the S&P Total Market index, in the relevant market capitalization range, is also considered in the selection of companies for the indices.
Company Type. All eligible U.S. common equities listed on eligible U.S. exchanges can be included. REITs are also eligible for inclusion. Closed-end funds, ETFs, ADRs, ADS, and certain other types of securities are ineligible for inclusion.
- Tesla is a U.S. company
- Tesla's market cap is well over $8.2B
- Tesla's float market cap is well over $4.1B
- Tesla's annual dollar value traded is currently around $1.5T, so the ratio to float adjusted market capitalization is around 7.0, and the lowest number of shares traded in a month during the past 6 months was June with volume of 256M shares.
- Tesla is considered "consumer discretionary" by the GICS, which is the third largest sector represented in the S&P 500 at 10.8%. The largest sector is Information Technology at 27.5%.
- Tesla is a U.S. common equity.
|https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview - Factsheet|
Timing of Changes S&P 1500 Composite Indices. Changes to index composition are made on an as-needed basis. There is no scheduled reconstitution. Rather, changes in response to corporate actions and market developments can be made at any time. Index additions and deletions are announced with at least three business days advance notice. Less than three business days' notice may be given at the discretion of the Index Committee. Announcements are available to the public via our Web site, www.spdji.com, before or at the same time they are available to clients or the affected companies.
Announcements. Announcements of additions and deletions for the S&P 500, S&P MidCap 400, and S&P SmallCap 600 are made at 05:15 PM Eastern Time. Press releases are posted on our Web site, www.spdji.com, and are released to major news services.
If you've been following the TSLA S&P 500 story, you might've heard some people mention that the S&P committee has previously changed the rules to target and exclude one very specific company, Snap. The S&P changed the rules to exclude new companies with multiple share classes from the index. Until now, I assumed that Snap had qualified for the S&P 500 and that because the committee did not want Snap in it for some reason, they came up with this rule to specifically exclude Snap. However, the first thing I found out when looking into this was that Snap never actually qualified for the S&P 500:
Snap has only been profitable during one quarter in its history, which by the way was after the S&P rule change, and it has never shown TTM GAAP profitability, so it never qualified for the S&P 500 in the first place. So what did happen?
What happens when a new stock is included in the S&P 500
There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total.
Shares outstanding: 185M
Shares outstanding: 4,330M
Public float: 4,330M
Specifically, the Trustee is required to adjust the composition of the Portfolio whenever there is a change in the identity of any Index Security (i.e., a substitution of one security for another) within three (3) Business Days before or after the day on which the change is scheduled to take effect.
S&P 500 quarterly rebalancing
Shares outstanding: 40
Shares outstanding: 40
2: S&P 500 Inclusion Case Studies
For a lot of stocks, not that much happens when they are included in the S&P 500. This is due to most stocks simply being moved from the S&P 400 mid cap index to the S&P 500 large cap index, because of an increase in market cap. In this case, institutions can simply move shares from their S&P 400 funds to their S&P 500 funds, and adjustments that have to be made are relatively small.
However, sometimes a stock that was previously not in any of the S&P indices is added to the S&P 500, because it previously did not qualify based on one of the requirements, such as a lack of profitability. In this case, the amount of shares that need to be bought, and the resulting affect on the stock price are more profound.
Although as we'll later discuss no S&P 500 inclusion before has ever quite been the same as TSLA's upcoming inclusion, to give some context as to what might happen to TSLA stock price upon inclusion, let's first do a few case studies of other companies that were included directly into the S&P 500, without being in any S&P indices previously.
- It was included in late 1999.
- The stock shot up some amount, 64% in five trading days if the article is to be believed, but this was around the time of the dot com bubble.
- YHOO's market cap was large, but only ~0.5% of the S&P 500 at the time, whereas TSLA will be around 1%.
- YHOO's stock price completely crashed not long after inclusion... as part of the dot com bubble bursting.
|TWTR 2018 |
|TWTR 23/4/18 - 30/6/18|
|NYSE 23/4/18 - 30/6/18|
Looking at Twitter's profits at the time, it only barely made it in by achieving $15M of TTM net income, and it was only Twitter's 2nd profitable quarter ever, so I doubt many people were expecting TWTR's S&P 500 inclusion before Q1'18 ER was announced, but looking at how strong TWTR's stock held up during bad macros during the last week of May, I would not be surprised if a number of active funds were positioning themselves ahead of what they knew would be TWTR's upcoming S&P 500 inclusion.
| FB July 2013 - June 2014 |
| FB 29/10/13 - 31/12/13 |
|NASDAQ 29/10/13 - 31/12/13|
Although many people believe TWTR's S&P 500 inclusion is the best comparison to TSLA's, I think FB is more similar in one particular way, namely that its inclusion wasn't entirely unexpected. Although just like TWTR, TSLA's last requirement it needs to fulfill to be eligible is profitability, unlike TWTR it is not an unexpected inclusion, and some people have been talking about it since at least late last year. This is similar to FB, whose last requirement was that it had to have been a publicly traded company for at least 6-12 months, and whose inclusion was also not totally unexpected. This article and this article indicate that people were expecting FB to be included some time in the near future as early as early 2013. FB's Q3'13 earnings were on October 30th, the official inclusion announcement came on December 11th, and the inclusion happened more than a week later after market close on December 20th.
3: TSLA's S&P 500 Inclusion
The big factors in play during TSLA's S&P 500 inclusion
1) Passive index funds buying
2) Active benchmarked funds buying
3) The large options market and resulting delta hedging mechanisms
4) TSLA Price Targets
Piper Sandler: $2,322JMP: $1,500Credit Suisse: $1.400Goldman Sachs: $1,300Wedbush: $1,250Jefferies: $1,200Deutsche Bank: $1,000Roth Capital: $750Morgan Stanley: $740Baird: $700Royal Bank of Canada: $615Bank of America: $485Citi: $450Cowen: $300Barclays: $300J.P. Morgan: $295GLJ Research: $87
5) Speculators and traders
Simplifying S&P 500 inclusion to a supply & demand issue
An estimation of the make-up of TSLA shareholders
TSLA post-inclusion stock price prediction
- At what price point are mostly institutions and to a smaller extent retail investors willing to sell enough TSLA shares for index and benchmarked funds to buy the shares they need (at least 26M+ shares)?
- How many additional shares will market makers have to buy to stay delta neutral during the rise in share price.
- How many shorts will cover?
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