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That fact doesn’t tell investors all that much about either company. It does say something about the stock market, disruption, and index construction.
Tesla stock went into the S&P 500 in December 2020 at a split-adjusted price of about $232 a share. At the end of trading Wednesday, Tesla stock was at $244.14 a share, 5% above the so-called add level. Apartment Investment left the S&P 500 at a price of about $4.50 a share. It closed at $6.89 on Wednesday, up more than 50%.
All “this got us thinking about the intersection of disruptive technology and index-based investing,” wrote DataTrek co-founder Nicholas Colas in a Thursday report.
Three things struck him.
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For starters, the S&P 500 index inclusion came after the blistering hot rally Tesla stock had in 2020. Shares rose more than 740% that year as the company started generating consistent profits and it became clear the Model Y was a big hit.
which controls S&P indexes, has several criteria for index inclusion, including profitability metrics. But the stock market is forward-looking, meaning all the good news about profitability was already accounted for in Tesla stock before it was added to the S&P 500.
The second observation from Colas is that, to some extent, the performance of Tesla shares since 2020 shows the market correctly valued the stock. “The company is consistently profitable and continues to expand,” Colas wrote.
Tesla stock has ranged from roughly $410 to $110 since its inclusion. The middle of that range is $260 a share, not far from where shares are trading now. That’s impressive to him. Still, “the nature of disruptive innovation is such that, over the next five to 10 years, Tesla will either be a much larger or a much smaller part of the S&P 500,” Colas added.
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The argument for smaller: More competition from other EV makers is coming and could erode Tesla’s market share. And larger? If Tesla can deliver on its goal of autonomous driving at scale, it will almost certainly be worth “far more than it is today,” Colas said.
As for shares of Apartment Investment, they dipped in 2020 amid a pandemic and have since recovered along with REITs more broadly. Shares haven’t performed particularly well as of late; the stock is off 17% over the past year.
Apartment Investment isn’t a disruptive company. It owns and manages apartment properties. Shares trade for about 23 times estimated 2024 funds from operations, or FFO, a metric analogous to earnings per share. Tesla trades at more than 60 times estimated 2024 earnings.
Higher valuations can also mean more volatility, which in turn draws increased trading activity and interest from all kinds of investors.
“This is not the first time an auto stock has captured the investing public’s imagination,” Colas said. “
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went public in 1956 and had over 200 investment banks on the deal because investor demand was so strong. It was included in the S&P 500 when it launched in March 1957 and has been in the index ever since.”
Since
went public, shares have increased by about fourfold, excluding dividends. Whether Tesla can match or beat those results is a question only time can answer.
Write to Al Root at allen.root@dowjones.com
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