The S&P 500’s New 800-Pound Gorilla (or is it Albatross?)
Unlike the practice of going “long,” investors who short a stock profit when it drops, not when it rises.
So, shorting “TulipsRUs” at $500 share yields a $450 gain if the price collapses to $50.
Ahhh, but what happens if “TulipsRUs” instead rockets to $1,000? (you ask).
Answer: the exact opposite — i.e., the “investor” (speculator?) is now in the red $500.
Add nine(!) zeroes, and you approximate Standard & Poor’s conundrum regarding high-flyer Tesla and its visionary, unorthodox CEO, Elon Musk.
6th-Most Valuable Company in U.S.
That’s because the S&P 500 — Standard & Poor’s eponymous stock fund (and the granddaddy of all indices) — purports to give investors exposure to the largest, most profitable U.S.-listed stocks.
But, how can any fund serve as a proxy for the crème de la crème of all U.S. stocks when it omits Tesla, suddenly the country’s sixth most valuable company, with a jaw-dropping market value of $625 billion?
Of course, along the way, Tesla was the 1,000th most valuable company, then the 500th most valuable, then the 50th most valuable, then . . . you get the idea.
With this year’s 7-fold(!) rise, Tesla became so valuable that it effectively forced S&P’s hand: Tesla officially joined the S&P 500 index yesterday (December 21).**
Holding the Bag
If Tesla continues its meteoric rise, post-inclusion, all’s well.
But what happens if Tesla subsequently turns out to be a relative flash-in-the-pan — or worse, does a Yahoo-like belly flop shortly after being added?
Then, all those widows and orphans invested in the relatively staid S&P 500 will be left holding the bag.
Ditto for countless retirees’ pension funds, millions of 401(k)’s, insurance company portfolios, and other institutional holdings.
Which scenario is most likely?
Suffice to say, for Tesla to repeat this year’s 7-fold feat, it would have to hit a market cap of $4.55 trillion.
That would surpass Germany’s GDP, and fall just short of Japan’s . . .
**Similarly, someone who shorts a stock that then soars is eventually forced to buy the stock in the open market, to staunch their losses.
Of course, at least in the short run, that only fuels demand for the stock.