Tesla has been left out of the latest additions to the S&P 500, dashing the carmaker’s hopes of joining the blue-chip index despite meeting the most onerous bar to entry: turning a consistent profit.
S&P Dow Jones Indices, which manages the benchmark, snubbed the California electric vehicle maker in the first round of additions since June, which were announced late on Friday. Tesla became eligible to enter the index after posting a profit in the second quarter and fulfilling the requirement of making four consecutive quarters of profits.
The Elon Musk-led company is the sixth-largest component of the Nasdaq Composite index and the only large company in the tech industry benchmark that is not a member of the wider S&P 500. The company’s $379bn market capitalisation is more than 100 times the smallest company in the S&P 500.
Recent speculation that the carmaker would join the index has helped to explain Tesla’s swift rally in recent months. The stock is up fivefold in 2020, despite falling 9 per cent on Thursday as a wave of volatility crashed against the tech stocks that have led the market this year. In after-hours trading on Friday, following news of its failure to join the S&P 500, the stock was down 7 per cent.
The S&P committee in charge of adding companies to the benchmark meets once a month but does not list reasons for why companies fail to make the cut. The company declined to comment.
One reason behind S&P’s decision to skip Tesla may relate to the source of its recent profits, analysts said. The company’s $483m of pre-tax profits in the first half of this year relied on $782m it made from selling regulatory credits to other carmakers. Tesla executives have said this will not be a long-term source of profits for the company.
The reliance on these credits means Tesla’s profits were “purely due to regulatory arbitrage — not fundamental profitability from designing, manufacturing and selling cars,” said Nick Colas of DataTrek. “This puts the S&P committee in charge of adding names to the 500 in a real bind.”
The exuberance of Tesla’s stock price this year may have also played a role. The company is now valued at 235 times its anticipated profits for 2020, compared to 26 for companies in the S&P 500.
Tesla did not immediately respond to a request for comment.
The three companies joining the index are Etsy, the arts and crafts marketplace, Teradyne, a manufacturer of testing equipment, and Catalent, a pharmaceutical company. The three joined from the S&P 400 benchmark of midsized companies and will switch places with tax software group H&R Block, Coty, a beauty company, and Kohls, a department store, which are dropping to the smaller index.
The three leaving the S&P 500 have all fallen sharply in value this year. Coty, the company behind the Max Factor and CoverGirl brands, has fared the worst of the trio, with a 66 per cent decline in its shares.
The S&P 500 is one of the most widely referenced benchmarks in financial markets and entry into the index can increase a company’s stock price given $11tn in assets track the benchmark, according to S&P estimates.