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S&P 500 Index Funds Double Down on Bubble Stocks

November 17, 2020 By Jeremy Jones, CFA

According to Tesla, the Model S all-electric car is one of the fastest sedans in the world. Photo | Tesla, U.S. Department of Energy

Tesla is being added to the S&P 500. Measured by market value, Tesla is the largest car company in the world and the 10th largest company in the United States. It is also the most expensive car company in the United States by a factor of almost 25 times when measured relative to sales. General Motors trades at .52X sales, Ford at .27X, and Tesla at 13.3X sales. Even if you assume Tesla can double sales by 2023, the stock is still about 12X as expensive as General Motors. Despite the astronomical valuation, funds that track the S&P 500 will make Tesla a top ten holding.

Doesn’t strike us as a terribly sound strategy. Bloomberg reports:

It may take a bit of innovation to get Tesla Inc. shares into the world’s most-influential stock index.

At almost $390 billion in value and growing, Elon Musk’s company would be the biggest ever added to the benchmark. Pushing it all in at once would force index-tracking funds into serious contortions — they’d need to sell upwards of $40 billion of stock in other constituents to make room. As a result, the index’s overseer, S&P Dow Jones Indices, is considering doing it in stages.

After months of speculation that contributed to a near-quintupling in the shares, S&P Dow Jones said Monday the 17-year-old company would be added to the gauge in December. The committee is seeking feedback from investors on whether to add it in two separate pieces, an unprecedented step. The company Tesla replaces will be named later.

“It wasn’t easy to make such an important decision, and this decision has a big impact,” said Howard Silverblatt, senior index analyst at S&P Dow Jones. He isn’t a member of the S&P 500 committee and is not associated directly with the decision to put in Tesla. “An open-ended dialog with investors will only help. You can’t put a company in at such a high level just like you would any other firm. The times have changed, the magnitude of the stocks that are being added has changed, too.”

Read more here.

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Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #5 in CNBC's 2021 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
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