Buy Tesla shares? Here’s what an analyst says before the addition of the S&P 500

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Tesla Inc. is set to join the U.S. equity major leagues on Monday, a relatively routine move that has become unprecedented by the scale of the Silicon Valley electric carmaker’s market valuation.

Tesla TSLA,
+ 2,69%
is by far the largest company to be added to the S&P 500 SPX index,
-0,75%.
Next Monday, when it starts trading on the benchmark, it will likely be the sixth largest company in the index by market value, currently well above $ 600 billion.

There is “strong precedent” for stock gains before their inclusion in the S&P and after the announcement, but very limited precedent for short-term outperformance after inclusion, said analyst Toni Sacconaghi of Bernstein in a recent note.
And since Tesla’s fourth-quarter sales report in early January is not expected to “be a blast, we recommend investors take short-term profits until December 21,” he said.

The 50 biggest additions to the S & P500 Index since 2010 have on average “strongly outperformed” before their announced inclusion in the S&P, outperformed by another 3% between announcement and inclusion, and “slightly underperformed” in the days and months following inclusion, Sacconaghi said.

On average, new entrants fell 1.7% within six months of inclusion, he said.

Tesla’s appreciation so far has been the most dramatic, with over 230% in the past six months, when hopes were high that the company would join the index after meeting criteria including profitability at long term.

So far this year, Tesla shares have gained around 700%, which compares to gains of around 14% for the S&P.

S&P Dow Jones Indices announced the inclusion of Tesla on November 16, after snubbing the company during an earlier rebalance. Highlighting the complexity of adding the company, he consulted with investors on how to proceed, ultimately deciding to add Tesla at the same time.

Since then, Tesla has seen its shares rise by more than 60% and add nearly $ 200 billion in market capitalization to the current $ 625 billion, roughly 10 times the CEO of General Motors Co.,
-2,51%
and 18 times Ford Motor Co. F,
-1,21%

See also: Tesla Debt Approaches S&P Good Quality Rating

Joining the S&P puts Tesla in countless index tracking funds, spilling over to the many managed funds that have had to add Tesla to their holdings to balance them.

It is likely that most repositionings will take place after Monday, Sacconaghi said.

In addition to the impending addition to the S&P 500 Index, Tesla had some good news on its corporate debt front on Thursday night.

S&P Global Ratings upgraded its Tesla bond rating to BB, leaving the company’s credit rating just two steps away from the coveted investment grade classification.

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