Tesla posted its first-ever four consecutive profitable quarters less than two months ago, but this was not enough to clinch a spot in the coveted S&P 500 Index.
Since Tesla achieved the feat of four profitable quarters in a row, getting included in the large-chip index came to be viewed almost as a foregone conclusion. The index inclusion, plus a share split, is widely credited for the stock’s surge in the last few weeks.
By joining the benchmark index, Tesla would have been included in the portfolios of more institutional investors–thereby raising demand for the stock.
Now that dream is no more, at least for another quarter. The index’s overseer, S&P Dow Jones Indices , undertakes a rebalancing every three months.
With Tesla rejected by the S&P Dow Jones Indices committee, bears and short-sellers have yet another reason to feel justified.
After the index overseer announced the latest rebalancing, Tesla fell 7% in after-hours trading on Friday, indicating the market was disappointed with the decision.
While it is too early to tell, the S&P 500 snub and other factors have increased the bearish sentiment around Tesla. The bears and short-sellers who have had a brutal year can now sigh with relief.
As of August 20, Tesla short-sellers had recorded mark-to-market losses of nearly $25 billion since the year started, according to S3 Partners.
With Tesla’s bullish argument not particularly strong now and with bulls deflated by the snub, the bears may have now been rejuvenated.
The S&P 500 snub will put the spotlight back on Tesla’s unflattering side. One of the reasons cited for the non-inclusion is the source of its recent profits.
In the first half of the year, the EV maker generated $483 million in pre-tax profits. This amount came from selling regulatory credits worth $782 million to other car manufacturers.
Tesla’s recent profits originated from regulatory arbitrage and not from its core business.
According to DataTrek analyst Nick Colas, this would have put the S&P 500 index overseer in a “real bind.”
Additionally, Tesla’s valuation relative to the S&P 500 average could have been a cause of concern. Currently, Tesla’s stock is trading at over 230 times its anticipated 2020 profits. The average for S&P 500 companies is 26 times their anticipated profits this year.
Additionally, including Tesla in the index would have resulted in unwanted volatility. As of Friday, the S&P 500 Index closed with a total market cap of $28.9 trillion . Tesla’s entry would have given it a 1.35% share of the index’s total. Tesla’s volatility would result in more turbulence for the benchmark.
Upcoming share dilution is another reason for Tesla bears to feel justified. At the beginning of the month, the EV maker announced it would sell new stock worth $5 billion .
The company will use the proceeds to strengthen its balance sheet as well as for general corporate purposes. This comes just months after Tesla conducted a secondary common stock offering to raise $2 billion .