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Stock Market: What Happens If Tesla Enters S&P 500

51 points by mancerayder 6y ago

mrep 6y ago
I wonder if it would be good time to do another equity raise. They raised 2 billion dollars earlier this year at a price of 767 (1,430 now) to fuel their growth because they thought there share price was high then. Once the inclusion is announced, it seems like a perfect time to me to announce another massive capital raise to further fuel their growth now that their share price is almost double from their previous raise and the index funds are going to have to buy about $35 billion to $40 billion of shares to get to the proper weighting according to the article. Why not do a massive capital raise which the index funds will buy a ton of to help get them to the proper weighting.
- yellow_lead 6y ago
  It's definitely a good idea. Companies seem to do equity raises when they perceive their stock price as overvalued. Musk has outright said this when their stock price was even lower too. The question will be if they need to do one though.
  - an_opabinia 6y ago
    They seem to, but then if you had bought Tesla shares the day they announced the raise, you would be looking at a huge speculative gain in your investment.
    - nine_k 6y ago
      I suppose the day before, because the price would jump in the first few seconds of trading.
  - rcMgD2BwE72F 6y ago
    How is that a good idea? They are already building 3 giant factories (Shanghai cont, Berlin, Austin), have enough cash for that and some more. They are profitable, free cash flow continues to increase as Model Y are delivered globally. They couldn't spend their money faster. Why would existing shareholders support a secondary?
- rcMgD2BwE72F 6y ago
  They don't need to, and it would make no sense to further dilute current shareholders. They have enough cash for operations and investments, free cash flow is increasing fast and will continue to do so, it makes no sense for shareholders to do a secondary to be included in the SP500 (the SP500 board may ask Tesla to offer liquidity but that is the index funds' problem not Tesla's, and such a concession would only benefit front runners instead of long terms investors). Besides, if market cap continue to grows as expected, SP500 will have to add TSLA at any price (otherwise the whole concept of SP 500 Index would be at risk). Also, many are waiting for Batter and Powertrain day to assess Tesla's ability to ramp production to 10+ million EVs in ~2030) so unless those plans disappoint, raising equity before September would be a let down.
  - take_a_breath 6y ago
    Of course they don’t need to, that’s not the point at all. They have, essentially, free money sitting there for the taking. A There is no guarantee the stock price will keep climbing, it could very well fall based on the P/E of 740. Borrowing against today’s inflated price in order to make acquisitions and investments actually seems like the fiscally responsible move.
    - rcMgD2BwE72F 6y ago
      Wait, do you support raising equity or borrowing from banks, at today's rate? I'm not sure what you consider being cheaper, and for who.
      - BbzzbB 6y ago
        Not OP but pretty sure he means a raise, at an incredibly cheap price for the company and shareholders.
        rcMgD2BwE72F 6y ago
        Let's assume that the company has more cash that it can spend now, that its free cash flow grows faster than capex + opex. Then, if an equity raise is "incredibly cheap for shareholders", that would mean shareholders consider the stock price to be higher than what they expect in the future, i.e many would be selling and the stock price would come down. I don't assume the stock market to be rational but this thesis does not hold much, as the company can easily raise debt now, at a much cheaper price for shareholders than equity. Let's wait and see.
- justapassenger 6y ago
  It's more complex. Basically, you have to be careful when playing with a bubble, or you'll pop it. Their astronomical stock growth, with no underlying business reasons (as in - nothing fundamentally changed about their business, or their competitors), that even CEO says made company overvalued, 50% ago is a bubble. They may grow into it, or slowly deflate it. But big pop of the bubble can be deadly to a company.
  - throw0101a 6y ago
    > Their astronomical stock growth Meanwhile, bond holders are asking for 4% more than similarly-size companies: > This is remarkable data, Tesla’s five-year bonds are yielding nearly 400bps more than their possible market capitalization neighbors in the S&P 500. * https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-the-sp-500-inclusion-process/ https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-th...
rcMgD2BwE72F 6y ago
More in-depth analysis by Rob Mauer: - Part 1 https://m.youtube.com/watch?v=JN8PNPBkaWc https://m.youtube.com/watch?v=JN8PNPBkaWc - Part 2 https://m.youtube.com/watch?v=3v-FFbdd_VM https://m.youtube.com/watch?v=3v-FFbdd_VM
nine_k 6y ago
My take: - Buy some TSLA now that its price has fallen recently. - Try to find out what other S&P 500 stocks would hedge fund managers have to sell to make room for TSLA. I suspect these won't be best-performing or long-term most promising stocks. Sell / short them now before they plunge, if you hold them for whatever reason.
- deleted 6y ago
  [deleted]
- tachyonbeam 6y ago
  The S&P committee can ask Tesla to issue shares to be sold directly to large funds so that the price doesn't move too much. This could be an opportunity for Tesla to raise 10 to 20B, which wouldn't be such a bad move, as it would allow them to erase all their debt and build more gigafactories or make acquisitions. So there is no guarantee that the stock price will go up even if Tesla gets included.
jefftk 6y ago
The S&P 500 made sense when tracking all public companies would have been too much work, but this kind of bookkeeping has gotten much easier. For example, Vanguard offers a low-fee total stock market index: https://investor.vanguard.com/mutual-funds/profile/VTSMX https://investor.vanguard.com/mutual-funds/profile/VTSMX If your model is "buy everything" then you avoid many awkward situations like this one.
- MR4D 6y ago
  Kindof. The mere fact that the S&P 500 exists causes the potential jump in price for that one stock, but since you hold everything in VTSMX, you also see the jump in TSLA. Worse, since you own every stock (not really, but close enough), you now have the 500 companies representing about $27 trillion of market cap, and then thousands more representing only another $8-9 trillion. So any change in the smaller companies is dwarfed by one good (or bad) day of AAPL, AMZN, GOOG, etc (as happened yesterday). So if you want the whole stock market, buy it in multiple pieces - a large cap, a small cap, and a mid-cap funds. As to your bookkeeping comment about being easier, you are absolutely correct. In fact, a competent financial advisor has the tools to trade the S&P themselves for clients (literally buying all 500 stocks individually and in correct proportions to the index). Market cap source: https://siblisresearch.com/data/us-stock-market-value/ https://siblisresearch.com/data/us-stock-market-value/
  - djrogers 6y ago
    > a competent financial advisor has the tools to trade the S&P themselves for clients (literally buying all 500 stocks individually and in correct proportions to the index). That’s not the point though. A one time buy is easy - rebalancing quarterly, and rebalancing when a huge new company is added is the hard part (as evidenced by the need for buying $35-40Billion worth of TSLA and selling an equivalent amount of other stocks).
    - MR4D 6y ago
      Depends on the scale. For vanguard, it’s a lot of work. For a financial advisor, the software to rebalance runs in a web browser on a laptop (heck, even an iPad!). Rebalancing has been figured out and automated very well for a few years now, with several different vendors all competing.
madballster 6y ago
I don't see an edge here. It could very well be that the stock sells off when the announcement comes because it has been well anticipated. This is not a risk-free trade as some make it out to be. Proceed with caution.
gruez 6y ago
Does this mean if I bought an all-cap etf, I won't be overpaying or get front runed? VTI for instance already holds Tesla shares.
- smabie 6y ago
  Your not over paying or getting front runed regardless, so I guess the answer is yes.
  - gruez 6y ago
    Why not? Doesn't inclusion into the index cause a surge in demand and therefore in price?
  - garmaine 6y ago
    Just FYI, if you are buying on Robinhood or similar service, you are getting front-runed. That’s why it’s free.
    - smabie 6y ago
      Payment for order flow isn't frontrunning.
    - gruez 6y ago
      That sounds super illegal: https://en.m.wikipedia.org/wiki/NBBO https://en.m.wikipedia.org/wiki/NBBO do you have a source to back up your claims?
      - garmaine 6y ago
        It would be illegal if Robinhood did the front running. They don't. Instead they sell your trade to a HFT firm to execute. What do you think is going on at the other side of that trade. They're dancing around the legal definition of front running, and they've gotten their hand slapped in the past for it. (E.g. they were fined $1.25M in 2019 for actual front running per the legal definition.)
throw0101a 6y ago
An observation someone made before the recent Q2 results were announced: > They will almost certainly make a profit [this quarter]. Last year they lost $400 MM in Q2. This year they sold almost exactly the same number of cars. They sold them at lower prices. They operated two car factories instead of one, which drives up fixed costs. There is no reason they should genuinely do better this year than last. But, since we are all willing to be blind to this obvious book cooking, they will, for sure, announce a profit. * https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-the-sp-500-inclusion-process/ https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-th...
- simonebrunozzi 6y ago
  I think "book cooking" is a bit exaggerated. They received a larger amount of government incentives, and more cars sold means more software sold (autopilot, etc), which has huge margins. That's, in my humble view, the main reason why they managed to make a profit, despite the larger capex you have mentioned. I'm not a Tesla fanboy but I have to admit that, besides the currently hyped stock price, I think it's a company that will do well in the long run.
throw0101a 6y ago
For more on S&P, an interview with one of the committee members: > Today on the Rational Reminder Podcast we have joining us Dr. David Blitzer who is the Managing Director and Chairman of the S&P Dow Jones index committee. He has been there from the time when indexes were barely even being traded and the first time S&P Futures began trading, and since then, indexing has turned into the massive phenomenon we all know today. Indeed, S&P indexes were (and still is) at the center of this explosion. Today Dr. Blitzer talks to us about the early days of indexing and shares some of his ideas about why indexing became so popular. We also discuss the possible reasons why some people still choose actively managed funds and the effect that the abundance of research has had on their dwindling appeal. Ever wondered where the rapid growth in indexing will end up? What happens after indexing? Can indexing become too big? Be sure to join us for this masterclass on indexing! * https://rationalreminder.ca/podcast/54 https://rationalreminder.ca/podcast/54 Blitzer recently retired: * https://en.wikipedia.org/wiki/David_M._Blitzer https://en.wikipedia.org/wiki/David_M._Blitzer
skybrian 6y ago
Vanguard has a search page where you can see how much Tesla (or any other stock) is in various Vanguard funds and ETF's. For example, it looks like it's 0.3% for VTI. [1] [1] https://advisors.vanguard.com/VGApp/iip/site/advisor/analysistools/holdingssearch?searchinfo=TSLA&isin=&orgCode=&selectedFunds= https://advisors.vanguard.com/VGApp/iip/site/advisor/analysi...
GoodJokes 6y ago
I don't know, but sounds like poker.

51 points by mancerayder 6y ago

mrep 6y ago

I wonder if it would be good time to do another equity raise. They raised 2 billion dollars earlier this year at a price of 767 (1,430 now) to fuel their growth because they thought there share price was high then. Once the inclusion is announced, it seems like a perfect time to me to announce another massive capital raise to further fuel their growth now that their share price is almost double from their previous raise and the index funds are going to have to buy about $35 billion to $40 billion of shares to get to the proper weighting according to the article. Why not do a massive capital raise which the index funds will buy a ton of to help get them to the proper weighting.

yellow_lead 6y ago
It's definitely a good idea. Companies seem to do equity raises when they perceive their stock price as overvalued. Musk has outright said this when their stock price was even lower too. The question will be if they need to do one though.
- an_opabinia 6y ago
  They seem to, but then if you had bought Tesla shares the day they announced the raise, you would be looking at a huge speculative gain in your investment.
  - nine_k 6y ago
    I suppose the day before, because the price would jump in the first few seconds of trading.
- rcMgD2BwE72F 6y ago
  How is that a good idea? They are already building 3 giant factories (Shanghai cont, Berlin, Austin), have enough cash for that and some more. They are profitable, free cash flow continues to increase as Model Y are delivered globally. They couldn't spend their money faster. Why would existing shareholders support a secondary?
rcMgD2BwE72F 6y ago
They don't need to, and it would make no sense to further dilute current shareholders. They have enough cash for operations and investments, free cash flow is increasing fast and will continue to do so, it makes no sense for shareholders to do a secondary to be included in the SP500 (the SP500 board may ask Tesla to offer liquidity but that is the index funds' problem not Tesla's, and such a concession would only benefit front runners instead of long terms investors). Besides, if market cap continue to grows as expected, SP500 will have to add TSLA at any price (otherwise the whole concept of SP 500 Index would be at risk). Also, many are waiting for Batter and Powertrain day to assess Tesla's ability to ramp production to 10+ million EVs in ~2030) so unless those plans disappoint, raising equity before September would be a let down.
- take_a_breath 6y ago
  Of course they don’t need to, that’s not the point at all. They have, essentially, free money sitting there for the taking. A There is no guarantee the stock price will keep climbing, it could very well fall based on the P/E of 740. Borrowing against today’s inflated price in order to make acquisitions and investments actually seems like the fiscally responsible move.
  - rcMgD2BwE72F 6y ago
    Wait, do you support raising equity or borrowing from banks, at today's rate? I'm not sure what you consider being cheaper, and for who.
    - BbzzbB 6y ago
      Not OP but pretty sure he means a raise, at an incredibly cheap price for the company and shareholders.
      - rcMgD2BwE72F 6y ago
        Let's assume that the company has more cash that it can spend now, that its free cash flow grows faster than capex + opex. Then, if an equity raise is "incredibly cheap for shareholders", that would mean shareholders consider the stock price to be higher than what they expect in the future, i.e many would be selling and the stock price would come down. I don't assume the stock market to be rational but this thesis does not hold much, as the company can easily raise debt now, at a much cheaper price for shareholders than equity. Let's wait and see.
justapassenger 6y ago
It's more complex. Basically, you have to be careful when playing with a bubble, or you'll pop it. Their astronomical stock growth, with no underlying business reasons (as in - nothing fundamentally changed about their business, or their competitors), that even CEO says made company overvalued, 50% ago is a bubble. They may grow into it, or slowly deflate it. But big pop of the bubble can be deadly to a company.
- throw0101a 6y ago
  > Their astronomical stock growth Meanwhile, bond holders are asking for 4% more than similarly-size companies: > This is remarkable data, Tesla’s five-year bonds are yielding nearly 400bps more than their possible market capitalization neighbors in the S&P 500. * https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-the-sp-500-inclusion-process/ https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-th...

rcMgD2BwE72F 6y ago

More in-depth analysis by Rob Mauer: - Part 1 https://m.youtube.com/watch?v=JN8PNPBkaWc https://m.youtube.com/watch?v=JN8PNPBkaWc - Part 2 https://m.youtube.com/watch?v=3v-FFbdd_VM https://m.youtube.com/watch?v=3v-FFbdd_VM

nine_k 6y ago

My take: - Buy some TSLA now that its price has fallen recently. - Try to find out what other S&P 500 stocks would hedge fund managers have to sell to make room for TSLA. I suspect these won't be best-performing or long-term most promising stocks. Sell / short them now before they plunge, if you hold them for whatever reason.

deleted 6y ago
[deleted]
tachyonbeam 6y ago
The S&P committee can ask Tesla to issue shares to be sold directly to large funds so that the price doesn't move too much. This could be an opportunity for Tesla to raise 10 to 20B, which wouldn't be such a bad move, as it would allow them to erase all their debt and build more gigafactories or make acquisitions. So there is no guarantee that the stock price will go up even if Tesla gets included.

jefftk 6y ago

The S&P 500 made sense when tracking all public companies would have been too much work, but this kind of bookkeeping has gotten much easier. For example, Vanguard offers a low-fee total stock market index: https://investor.vanguard.com/mutual-funds/profile/VTSMX https://investor.vanguard.com/mutual-funds/profile/VTSMX If your model is "buy everything" then you avoid many awkward situations like this one.

MR4D 6y ago
Kindof. The mere fact that the S&P 500 exists causes the potential jump in price for that one stock, but since you hold everything in VTSMX, you also see the jump in TSLA. Worse, since you own every stock (not really, but close enough), you now have the 500 companies representing about $27 trillion of market cap, and then thousands more representing only another $8-9 trillion. So any change in the smaller companies is dwarfed by one good (or bad) day of AAPL, AMZN, GOOG, etc (as happened yesterday). So if you want the whole stock market, buy it in multiple pieces - a large cap, a small cap, and a mid-cap funds. As to your bookkeeping comment about being easier, you are absolutely correct. In fact, a competent financial advisor has the tools to trade the S&P themselves for clients (literally buying all 500 stocks individually and in correct proportions to the index). Market cap source: https://siblisresearch.com/data/us-stock-market-value/ https://siblisresearch.com/data/us-stock-market-value/
- djrogers 6y ago
  > a competent financial advisor has the tools to trade the S&P themselves for clients (literally buying all 500 stocks individually and in correct proportions to the index). That’s not the point though. A one time buy is easy - rebalancing quarterly, and rebalancing when a huge new company is added is the hard part (as evidenced by the need for buying $35-40Billion worth of TSLA and selling an equivalent amount of other stocks).
  - MR4D 6y ago
    Depends on the scale. For vanguard, it’s a lot of work. For a financial advisor, the software to rebalance runs in a web browser on a laptop (heck, even an iPad!). Rebalancing has been figured out and automated very well for a few years now, with several different vendors all competing.

madballster 6y ago

I don't see an edge here. It could very well be that the stock sells off when the announcement comes because it has been well anticipated. This is not a risk-free trade as some make it out to be. Proceed with caution.

gruez 6y ago

Does this mean if I bought an all-cap etf, I won't be overpaying or get front runed? VTI for instance already holds Tesla shares.

smabie 6y ago
Your not over paying or getting front runed regardless, so I guess the answer is yes.
- gruez 6y ago
  Why not? Doesn't inclusion into the index cause a surge in demand and therefore in price?
- garmaine 6y ago
  Just FYI, if you are buying on Robinhood or similar service, you are getting front-runed. That’s why it’s free.
  - smabie 6y ago
    Payment for order flow isn't frontrunning.
  - gruez 6y ago
    That sounds super illegal: https://en.m.wikipedia.org/wiki/NBBO https://en.m.wikipedia.org/wiki/NBBO do you have a source to back up your claims?
    - garmaine 6y ago
      It would be illegal if Robinhood did the front running. They don't. Instead they sell your trade to a HFT firm to execute. What do you think is going on at the other side of that trade. They're dancing around the legal definition of front running, and they've gotten their hand slapped in the past for it. (E.g. they were fined $1.25M in 2019 for actual front running per the legal definition.)

throw0101a 6y ago

An observation someone made before the recent Q2 results were announced: > They will almost certainly make a profit [this quarter]. Last year they lost $400 MM in Q2. This year they sold almost exactly the same number of cars. They sold them at lower prices. They operated two car factories instead of one, which drives up fixed costs. There is no reason they should genuinely do better this year than last. But, since we are all willing to be blind to this obvious book cooking, they will, for sure, announce a profit. * https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-the-sp-500-inclusion-process/ https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-th...

simonebrunozzi 6y ago
I think "book cooking" is a bit exaggerated. They received a larger amount of government incentives, and more cars sold means more software sold (autopilot, etc), which has huge margins. That's, in my humble view, the main reason why they managed to make a profit, despite the larger capex you have mentioned. I'm not a Tesla fanboy but I have to admit that, besides the currently hyped stock price, I think it's a company that will do well in the long run.

throw0101a 6y ago

For more on S&P, an interview with one of the committee members: > Today on the Rational Reminder Podcast we have joining us Dr. David Blitzer who is the Managing Director and Chairman of the S&P Dow Jones index committee. He has been there from the time when indexes were barely even being traded and the first time S&P Futures began trading, and since then, indexing has turned into the massive phenomenon we all know today. Indeed, S&P indexes were (and still is) at the center of this explosion. Today Dr. Blitzer talks to us about the early days of indexing and shares some of his ideas about why indexing became so popular. We also discuss the possible reasons why some people still choose actively managed funds and the effect that the abundance of research has had on their dwindling appeal. Ever wondered where the rapid growth in indexing will end up? What happens after indexing? Can indexing become too big? Be sure to join us for this masterclass on indexing! * https://rationalreminder.ca/podcast/54 https://rationalreminder.ca/podcast/54 Blitzer recently retired: * https://en.wikipedia.org/wiki/David_M._Blitzer https://en.wikipedia.org/wiki/David_M._Blitzer

skybrian 6y ago

Vanguard has a search page where you can see how much Tesla (or any other stock) is in various Vanguard funds and ETF's. For example, it looks like it's 0.3% for VTI. [1] [1] https://advisors.vanguard.com/VGApp/iip/site/advisor/analysistools/holdingssearch?searchinfo=TSLA&isin=&orgCode=&selectedFunds= https://advisors.vanguard.com/VGApp/iip/site/advisor/analysi...

GoodJokes 6y ago

I don't know, but sounds like poker.