What’s the Password? - The Average Joe

What’s the Password?

September 10, 2020

On Sep. 4, the S&P 500 announced their latest additions to the index: Etsy ($ETSY), Teradyne ($TER) and Catelent ($CTLT). Where’s Tesla ($TSLA)? Not on the list. After fulfilling the minimum requirements, investors have speculated Tesla’s imminent addition into The S&P 500 index.

Exclusive S&P 500 club

The S&P 500 is an index that tracks the performance of 500 of the largest publicly-traded companies in the US. Investors use this index to get a sense of the market direction on a daily basis. Many investors use the average return of the S&P 500 to benchmark their own portfolio. Over the past 90 years, the S&P 500 returned 9.8% annually. Are you beating the market average?

The S&P 500 committee meets once a month and makes changes to the index when it’s “necessary”. To be considered for the list, companies must meet a set of minimum requirements:

  • US-based and listed on either the NYSE, Nasdaq or Cboe… ✅ Tesla is listed on the Nasdaq.
  • Market capitalization of more than $8.2b… ✅ Tesla has a market cap of ~$320b.
  • Have reported 4 straight quarters of making a profit… ✅ Tesla has made a profit in the past 4 quarters.

So why didn’t Tesla make the cut? The S&P 500 has declined to state why but reporters are speculating their source of earnings to be the reason. In the first half of the year, Tesla made a pre-tax profit of $473m. The company had sold $727m in regulatory credits to other carmakers which helped Tesla squeeze out a profit. These credits are an inconsistent source of revenue that may have crushed Tesla’s chances of joining the club. But don’t count Tesla out yet – at their current earnings growth, it may only be a matter of time before they’re added to the S&P 500.

Benefits of joining the S&P 500

Everyday investors anticipated a big jump in Tesla’s stock after joining the S&P 500 but is this really true? In a study created of over 500 companies that joined the S&P 500 between 1997-2017, results show us that joining the S&P 500 may not be as lucrative as it seems…

  • Initial bump… Between 1997-2007, stock prices of newly added companies increased by up to 4.9% in the first week of joining the index. Between 2007-2017, this initial increase dropped to 0.7%.
  • Running out of gas… Throughout 1997-2017, on average, stock prices of newly joined companies will fall over the next 12 months.

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