- S&P Dow Jones Indices to add Tesla its flagship S&P 500 index next month
- Tesla share price soared over 13% to $460 in after hours trading on Monday
- Bulls will now target a new record high above $502.49
Shares of the electric carmaker Tesla (NASDAQ: TSLA) soared over 13% in pre-open Tuesday on the announcement that the company is expected to join the S&P 500 next month.
Fundamental analysis: Tesla finally added to S&P 500
The news was announced by the S&P Dow Jones Indices which said that Tesla would join the S&P 500 index before the trading begins on December 21, likely in two tranches to make it easier for investment funds.
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“(Tesla) will be one of the largest weight additions to the S&P 500 in the last decade, and consequently will generate one of the largest funding trades in S&P 500 history,” S&P Dow Jones Indices said.
Tesla, which has a market cap of more than $400 billion will be one of the biggest additions to the S&P 500, bigger than 95% of the index’s current components.
S&P Dow Jones Indices indicated that the addition of Tesla means that investment funds indexed to the S&P 500 would have to dispose of around $51 billion of shares of its components and use that capital to invest in Tesla. The carmaker will account for around 1% of the S&P 500.
Furthermore, investment funds that compete to outshine the S&P 500 will have to decide whether they will invest in Tesla or not. These funds hold trillions of dollars in other assets.
However, some investors believe the carmaker’s stock is in the bubble and have advised against including it in the S&P 500 at current levels.
“(Monday’s) price jump means the retirees and other individual investors who put their money into index funds will see some of their money go into Tesla stock at a price even higher than its controversially high pre-S&P price. It’s a downside of index investing for conservative investors,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business.
Technical analysis: Shares surge
Following the S&P 500 news, Tesla share price soared over 13% to trade around the $460 handle in after hours trading on Monday. Today’s high also represents the 5-week high for shares of the electric carmaker.
From the technical viewpoint, Tesla stock price is now trading outside of the symmetrical triangle. This is likely to facilitate more TSLA buying as bulls target a new record high above $502.49.
Tesla will be joining the S&P 500 in December, an announcement that sent its shares up 14% in after hours trading Monday.