John O'Connell discusses Tesla
David Blitzer had been enjoying a fairly quiet retirement until the S&P 500 selection committee he ran for a quarter century decided last month against adding Tesla Inc. to the index. Suddenly, he said, his telephone began ringing constantly.
“I’ve gotten calls from people who know I haven’t been on the committee for a year and a half and barely ever call me about stocks, and they say, why didn’t they do it?” Blitzer, 71, who stepped down from the S&P Dow Jones Indices panel in 2019, said in an interview for the Trillions podcast. “The amount of chatter about Tesla is staggering.”
And while Blitzer is quick to note that he has no knowledge of the committee’s deliberations and retains zero influence with its members, his message for those callers -- and all the other investors anxious to see Elon Musk’s electric car company join the world’s most followed index -- is that changes like this sometimes take time.
While size counts in deciding who gets in, it isn’t everything, he says. Index overseers often wait to see what happens when a stock has surged over a short time, for instance. That a company meets all of the formal criteria doesn’t ensure anything -- the goal during Blitzer’s tenure was to construct a “great measure of the market,” rather than simply lump together the biggest companies.
Thus, a massive run-up -- such as Tesla’s dizzying rally -- might warrant caution to see if it reverses course.
“There’s plenty of times when there’s big names, popular names, well-known names that don’t get added the moment they’re eligible,” Blitzer, adding that he expects Tesla will eventually go in. “I think the real question is, why the rush?”
Tesla’s snub from the S&P 500 shocked parts of Wall Street after it posted a fourth straight quarterly profit -- the last quantitative hurdle for being added. Anticipation Tesla was going in helped send the shares up as much as 495 per cent this year. Still, the role of human judgment is evident in the index’s description, which says the S&P 500 “seeks to represent the leading companies in leading industries.”
The rally ballooned its market value to nearly US$400 billion, making it one of the largest companies listed on a U.S. exchange. Its dominance in the stock market has helped fuel the tech-heavy Nasdaq 100 nearly 30 per cent higher year-to-date, besting the S&P 500’s four per cent gain in 2020. It’s been a gut-wrenching run: the shares have swung an average of 4.4 per cent a day in 2020, compared to 1.5 per cent for the S&P 500, data compiled by Bloomberg show.
Even for Tesla, getting a place in the world’s most-followed benchmark would be a significant milestone. S&P 500 inclusion widens a company’s investor base to the nearly US$11 trillion of passively managed funds that track the index. Tesla fell 21 per cent in the days following the rebuff and is roughly nine per cent lower this month.
The fervor around this particular decision is unmatched, Blitzer said. The closest analog is probably Microsoft Corp., which completed its initial public offering in 1986 but wasn’t added to the S&P 500 until 1994. The issue at the time was that the company owned over half of its outstanding shares -- one of the index’s metrics for consideration is that at least 50 per cent be publicly floating.
The committee was “pounded” over not adding Microsoft, which had a market cap of over US$20 billion at the start of 1994, Blitzer said. But even after the company sold the necessary amount of shares and was added, the grumbling didn’t stop -- dealing Blitzer a lesson in patience.
“After the fact -- they sold off some stock, we put in the index, everybody figured they’d forget -- we still got complaints,” Blitzer said. “So there have been other big ones, but I guess some of us learned to shrug and say, ‘we’ll wait ‘til next month.’”