23.12.2020 – Special Report. A bitter case of “sell the news”: Tesla shares completed their first day on the S&P 500 on Monday. And it plummeted by a hefty 6.5 percent. Yesterday was hardly any better, with another 1.5 percent drop. If that is not a bad omen for the overheated overall market. We analyse what the mega-event means for investors.
Sellout at Tesla
Sobering performance of the giant: Tesla investors had to witness how the share, which had previously been pulled upwards by call options like a dust storm, suddenly became a loser. Up to now it had been going steeply uphill: Last week Tesla had reached a market value of around 615 billion dollars. The e-car manufacturer thus surpassed Toyota, General Motors, Daimler, Volkswagen, BMW, Honda and Ford together – all these manufacturers, which have mutated into dwarfs by comparison, only made 580 billion dollars. And Tesla has hardly made any profits so far. However, we don’t begrudge the ingenious Serbian-Croatian inventor Nikola Tesla his late tribute on Wall Street.
Sell the News
But for Tesla shares, the previous week may have been the peak. Craig Irwin, an analyst at Roth Capital Partners, told Bloomberg, “Hedge funds will treat this as a negative catalyst for Tesla given buying pressure eases off very quickly.” So it could go further downhill. Especially as the share is now hovering at around 640 dollars, quite far above the 50-day line, which was last at 505 dollars. And the 200-day line as the next possible stop was at 315 dollars.
Index pioneer Rob Arnott believed in the bursting of the bubble even before the SPX took off. He recently published an article called “Tesla – The Largest-Cap Stock Ever to Enter S&P 500: A Buy Signal or a Bubble?”. Arnott dug through 31 years of data and found that a stock that makes it into the top 100 drops 7 percent in the year after it joins the index. Not a good sign for the SPX. On the other hand, the share that was thrown out of the index for the newcomer gained 20 percent. An interesting argument, then, for the share of Apartment Investment and Management, which has lost 46 percent this year.
Maybe the air is out
According to Arnott, the index decision-makers at S&P Dow Jones Indices tend to misbehave in this way: “buy high and sell low. And further: “too much dependence on companies whose best days may be behind them.” Arnott told Bloomberg: “It’s run up 800% from the March lows. Now you want to add it?” Since the news of its inclusion in the S&P 500, the stock has risen another 50 percent – the question is what positive news is left now, he said. Market strategist Vincent Deluard of StoneX was also less than enthusiastic. He wrote “Time to Fire the S&P 500 Index Committee.”
Goldman does not see a big problem
Chief Equity Strategist David Kostin of Goldman Sachs, on the other hand, took a positive view of the index inclusion, which may not be entirely altruistic. He wrote: “when Tesla joins the S&P 500 next week it will lift the index P/E ratio by just 0.4 multiple turns, much less than most investors expect.” The share will only have a weighting of around 1.5 percent. In other words, nothing will actually change and even a volatile giant like Tesla will not affect the index. And then Kostin’s somewhat contradictory main argument – which the index operators probably also see: If Tesla, with its stellar performance, had been part of the index all year, its return would have climbed by 2 percentage points. So the stock does have some influence on the index.
Apple or checkout
We think: Tesla has to deliver now and bring in profits – otherwise the share could quickly deflate a lot more and drag down other tech stocks as well as the entire SPX. The share brings a price-earnings ratio of around 280, so so much hope and euphoria must first be justified in real business. Especially since other well-known manufacturers such as VW and Porsche are also coming up with interesting e-cars and Tesla is not a monopolist.
The remaining possible positive news is the possible inclusion in the Dow Jones. In that case, many fund managers who track the index will have to buy more shares – as was already the case before the inclusion in the SPX. Perhaps the current setback was just a completely natural pocketing of profits. Also partly responsible for the selloff was the fact that Apple announced plans for its self-driving car – what mean timing of “Project Titan”. Perhaps TSLA will recover from this little competitive shock.
Sign for a top
But perhaps the appearance of the mega-share TSLA is a bad omen for long investors – a signal for the peak of the bull market. We already know this from the dotcom bubble some 20 years ago: Great global market leaders making zero or little profits were traded on the stock market at gigantic valuations.
We are keeping an eye on the situation for you – the Bernstein Bank wishes you successful trades and investments!
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