It is an unfortunate time for the market and most probably for Tesla. Can you believe it was not included in the S&P 500 recently? New lists of companies are always added to the S&P 500, and it was shocking to see that Tesla did not make it. Now, what does that mean for the stock market?
Hello and welcome to another video section on my channel. This video, like the others, is promising to be quite as entertaining and will give you more insight into what is actually happening in the stock market. You might want to check out other related works on my channel like “Stocks to invest in this year” and “The looming crash of the stock market in 2020”.
Now, let’s get down to the business of the day. Is the stock market going to crash? Why is Tesla not included in the S&P 500? Will they ever be included in the S&P 500? What other new companies made it to the S&P 500? These are some of the questions that may come to the mind of an investor who was informed of the Tesla situation.
Tesla, as a company has a large market cap of 332.003 billion dollars. This makes it one of the largest companies in the world that are involved in public trade.
For the sake of curiosity, below is a list of the top ten companies in the S&P 500 list sorted by their market caps.
- Apple Inc. (AAPL) – $2.04T
- Amazon.com Inc. (AMZN) – $1.627T
- Microsoft Corp (MSFT) – $1.583T
- Alphabet CI C (GOOG) – $1. 058T
- Alphabet CI A (GOOGL) – $1.059T
- Facebook Inc. (FB) – $789.76B
- Berkshire Hathaway CI B (BRK B) – $518.26B
- Wal-Mart Stores (WMT) – $397.69B
- Visa Inc. (V) – $427.70B
- Johnson & Johnson (JNJ) – $387.95B
It is no surprise that the top companies in the world are on this list. Now, if Tesla was included in the S&P 500, it would obviously have made it to top fifteen in this list. Some time ago, Tesla was known to be pushing for a higher market cap of about four hundred and fifty billion dollars. With this amount of money stated as their market cap, they would have made it easily into the top ten companies in the S&P. I am going through these tiny details just to show you that Tesla should probably be on the list.
There were speculations and rumours flying around about the fate of the company, and many of the investors were actually bullish with the investments, but an official statement of the S&P recently released showed that it was not included.
Do I say this is kind of a lesson to investors who are so sure of their stocks? The market is very volatile now, and the investors are meant to tread with caution. There were comments like “Tesla is too big a company not to be included in the S&P 500” and things like that. Those investors who said things like these may now have to swallow their words, won’t they?
If you are one of the people who are investing in Tesla just because it was one of the companies in the S&P list over the years, it is time to take a reality check and maybe sell the stock. After dropping out of the S&P 500 list, Tesla stocks nosedived 6.41 per cent. There is a little bit of confusion somewhere though. This confusion arises from the fact that investors do not know why Tesla was omitted from the list.
I was one of the investors that were curious enough to know why Tesla was not included because according to me, they met all the requirements. So, I did a little digging into the official brochure of the S&P 500 requirements. Here is what I found:
According to the documents, a company will be eligible for inclusion into the S&P 500 index list if it is a U.S company, has a public float of above fifty per cent, has a market cap of at least eight billion dollars, and has positive values on their most recent earnings and sums of four consecutive quarters’ earnings. Now, if you look at all these criteria, you will clearly note the source of confusion of investors. Tesla met all the criteria stated above, including a market cap of over three hundred billion, public float of over eighty per cent, and positive values in all their numbers. So, what then is the problem?
From my point of view, I think it was not included in the S&P 500 because it was a little too easy to see if they can keep up the productivity in the upcoming quarters. Yes, Tesla may have made positive numbers in the last four quarters, and that is fine. The question now is, will they make it in the next four? That is not certain, and investors have different opinions on that. So, as I said, my opinion is the S&P board might be considering giving them a few more months to check their production levels and make sure it was no mistake that they did great in their last four quarters. If Tesla maintains this productivity and consistency levels in the coming months, I see no reason they should not be included in the S&P 500. The S&P board meets monthly to carry out a balancing which includes taking some companies out and bringing some in.
Also, if you look at the credit sales from Tesla in the last twelve months, you will see that regulatory credit is looking like their major source of income. And if the regulatory credit should be removed, Tesla would be running at a major loss.
They are just points or credits awarded to companies by their various federal and state governments for keeping the environment free of pollution. Now, most auto manufacturers get awarded so much regulatory credits that they sell to other companies, using the money to make other profitable investments. The S&P board may just be hoping they can manage these high margins of profits without having to rely heavily on regulatory credits, even though it is a justifiable part of business. It is not all bad news for Tesla and its investors because the ratio of its regulator credits to its total revenue has been dropping consistently.
It may not be much but I also believe the hype and speculations that always surround the stock market had a hand in the Tesla situation. The S&P board may have thought that the prices were boosted by hype trading. They may have thought to wait till the price action dies down just to see how well Tesla will fare.
The big question is, what does this mean for Tesla and its shareholders?
Well, most of the individual and company investors who invested in Tesla for a reason for their inclusion in the S&P 500 are now selling their shares. It is because they believe the aim has been defeated. Some of these investors are actually positive that the company will still make it to the list in the coming months. It just implies that those who are selling now actually invested for the sole reason of inclusion in the S&P 500. If you are holding onto your Tesla stocks, you need to bear in mind the volatility of the stock market and consider that it could get better or worse in the coming months.
On the bright side, Tesla is holding its 2020 annual meeting of stockholders and battery day at the end of this month. If you are an investor, it would be nice to attend and hear what new plans and strategies the company may have about moving forward.
Now, if Tesla was not included, it simply means some other companies took the spot. These companies are Etsy Inc. (ETSY), Teradyne Inc. (TER), and Catalent (CTLT). They replaced H & R Block (HRB. N), Coty (COTY. N), and Kohls (KSS. N). The interesting thing is that their combined market cap is not up to twenty per cent of Tesla’s market cap. The positive effect is already taking place because ETSY now has a positive of 5.70 per cent, TER was up by 1.72 per cent, and CTLT was up by 1.07 per cent.
How do you trade given these changes?
In my view, their prices will fall into place. So, a little patience may be key. As an experienced stock trader, I would advise that you wait for the more inexperienced ones to panic sell and you can buy at a better price.
It is a sad time for Tesla as a company and its investors. However, all hope is not lost because as long as they maintain this high level of profitability, they are sure to make it to the coveted S&P 500 list. Considering its size, market cap, and growth curve, it is almost inevitable. So, if you enjoyed this video, like and share it. Also, subscribe to my channel and try to air your views and comments.
Recommended books for further reading:
- Intelligent Investor
- The Little Book of Common Sense Investing
- Stock Market Investing For Beginners
- The Stock Market Investing Guide #2020
- The Financial Times Guide to Investing
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- Silver & Gold coins
- Interactive Brokers
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