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Tesla’s S&P 500 Snub Will Embolden Bears & Short Sellers

Last Updated September 23, 2020 2:28 PM
Mark Emem
Last Updated September 23, 2020 2:28 PM
  • Despite high hopes, fulfilled included hitting four profitable quarters in a row.
  • The company recently hit four profitable quarters in a row–a fundamental condition for inclusion in the index.
  • The case for Tesla bears and short-sellers is more robust now.

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.

Tesla will not be included in the S&P 500 Index, at least for the next three months. | Source: @richtechexec/Twitter 

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.

A New Lease on Life for Tesla Bears and Short-Sellers?

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.

For 2020, Tesla short-sellers made mark-to-market losses of over $20 billion as of August. | Source: @ihors3/Twitter 

With Tesla’s bullish argument not particularly strong now and with bulls deflated by the snub, the bears may have now been rejuvenated.

Why Tesla Was Left Out of the S&P 500

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.

Elon Musk
Compared to other S&P 500 companies, Tesla is overvalued based on anticipated earnings. | Source: @connectajitcpr/Twitter 

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.

Share Dilution Is Coming

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 .

Tesla is raising $5 billion in the stock market after selling stock worth $2 billion in February. | Source: @CNBC/Twitter 

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 .

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.