shares roared to a record high on the eve of their inclusion in the S&P 500, punctuating a 2020 rally that has propelled the electric-car maker into the ranks of the most-valuable U.S. companies.
Big swings in shares of the Fremont, Calif., company overshadowed a blah day for the broader market that saw the Dow industrials drop 124 points, or 0.4%, to 30179. Tesla trading was heavy throughout Friday before rising to a fever pitch in the last moments of the market day, when index funds that track the S&P began preparing to purchase billions of dollars worth of Tesla stock to match their holdings with the broad index.
Tesla shares soared in the morning before slumping in late-afternoon trading and trading in and out of the red throughout the last hour. They finished up $39.10, or 6% to $695, a closing record—some $40 a share above their last trade in the moments before the market-closing auction at Nasdaq. Traders had said the firm’s addition to the broad index raised the possibility of an epic squeeze as index funds scrambled to buy shares.
Investors who followed the up and down through the last chunk of the trading day suffered “a little bit of whiplash there,” said Mike Bailey, a director of research at FBB Capital Partners.
“It was definitely a little choppy there in the last hour,” Mr. Bailey said.
Tesla’s rise has turned into a signature chapter in a remarkable year for stocks. The company, led by a charismatic and at times erratic chief executive,
has benefited greatly from the investor embrace of top technology firms following the enactment of government and central-bank stimulus programs to mitigate the coronavirus pandemic. The company’s attractive cars, improving finances and rising share price have created a strong following among investors.
“It’s the best car I’ve ever driven,” said Eric Mandela, a 38-year-old individual investor who has owned the shares since 2014. “The first time I drove it I felt the same way I did when I held the iPhone for the first time.”
He plans on holding his Tesla shares for the long term.
At the same time, many analysts warn that Tesla shares are vulnerable to a significant pullback following their sevenfold increase this year, a rise that skeptics say hasn’t been paralleled by similar increases in the company’s financial results. The firm’s inclusion in the most widely tracked market index could weigh on returns for retirement savers and other risk-averse investors who would generally be less likely to purchase the shares outright, investors said.
Even those who say that they plan to hold the shares for the long term, confident that the company will continue to be a strong investment, are bracing for volatility ahead.
“I struggle with that, the share price,” said Brooke de Boutray, a portfolio manager at Zevenbergen Capital Investments LLC, which has some $600 million worth of shares. She remains bullish on the stock but said Tesla’s yearlong surge has the potential to pressure returns in the months ahead.
Tesla’s gains reached new heights in recent days. Since Nov. 16, when S&P Dow Jones Indices said it would be added to the gauge, Tesla has added about $272 billion in market value, greater than the entire market capitalization of Toyota.
The closing auction, held at 4 p.m. EST and determining end-of-day prices for thousands of stocks, has gained increased importance in recent years as more money has piled into passive investments. At 3:50 p.m. exchange-operator Nasdaq Inc., which lists Tesla shares, started sending out information on order imbalances ahead of the closing bell, showing that there was more demand to buy rather than sell the shares, traders said. That drove the price of Tesla sharply higher as traders started to respond to those signals.
In the last 10 minutes of trading, Tesla gained $33.09 or 5%, according to Dow Jones Market Data. About 1.7 billion shares worth more than $150 billion traded within seconds in Nasdaq’s auction, the highest dollar amount ever.
Even before the closing bell, traders flocked to the options market to bet on bigger gains in Tesla shares, sending volumes to a record. Some of the most active bets were bullish calls tied to the shares jumping to $700 or even $740, Trade Alert data show, for options expiring the same day, a sign many were positioning for the stock to shoot higher within hours.
Some traders and investors have said that they are poised for some of the excitement surrounding Tesla shares to dissipate in coming days, leading to a price decline. That would track with what often happens in such cases, said Ilya Feygin, a managing director at WallachBeth Capital.
“Typically such growth stocks rise a lot before inclusion and then underperform after inclusion,” said Mr. Feygin.
He pointed to
which jumped about 7.5% from the time its inclusion became public to the actual addition to the Dow Jones Industrial Average in August. The shares are down roughly 10% since then.
Rob Arnott, chairman of investment firm Research Affiliates, contends that Tesla’s massive rally this year meets his definition of a bubble: Implausible assumptions are needed to justify its lofty valuation and buyer interest is driven by a compelling narrative rather than the hard math of price-earnings multiples and other conventional investment metrics.
“Bubbles almost always burst,” said Mr. Arnott, suggesting that next week could mark the start of Tesla’s reversal.
Tesla wouldn’t be the first large S&P 500 addition to face sharp selling. Yahoo’s market capitalization, for example, peaked less than a month after it joined the S&P 500 in December 1999, while Qwest Communications’ valuation topped out the same day it was added to the index in July 2000. Neither stock trades today.
meanwhile, also jumped after S&P said it would add the social network to the broad benchmark, rising 17% over an eight-day stretch between the announcement and the inclusion in 2013. Facebook shares slid 6% the following month as investors’ fervor abated. The S&P 500 declined just 2% over that same period.
Short sellers, who borrow shares and sell them in a bid to profit by repurchasing them at lower prices later and pocketing the difference, have crept back into wagers against the company in recent weeks. Bearish investors held nearly 50 million Tesla shares short as of Thursday, about three million more than short sellers had in late November, according to data from S3 Partners. Those bets represent about $32.6 billion worth of Tesla stock, making it biggest short in the stock market.
About two thirds of analysts who track Tesla have a sell or hold call on the stock, and price targets average out to about $416 a share—a 40% discount to Friday’s close. Among the most bearish is JPMorgan Chase & Co. analyst
who had set a $90 target on Tesla earlier this month.
Still, the gains have made such caution look foolish to supporters in the past, and many expect that to continue.
“I’m just so excited about the future of this,” said Jason DeBolt, a 39-year-old software engineer in Los Angeles who purchased his first shares in Tesla in 2013 after buying a Model S. He says he has netted roughly $8 million since then, making Tesla his biggest investment by far.
“I’m not willing to let go of any shares,” he added.
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