Thoughts On Tesla’s [TSLA] S&P 500 Inclusion & 100 Million Missing Shares

In a well-written thread on Twitter that he also added to his blog, Frank Peelen has shared his thoughts about TSLA’s S&P 500 inclusion and his theories on the 100 million missing TSLA shares. He also briefly mentioned a previous blog post in which he aimed to predict TSLA’s post-inclusion stock price.

Predicting TSLA’s Post-Inclusion Stock Price

Back in July, Frank shared his thoughts in a blog post titled Tesla’s S&P 500 Inclusion: Predicting TSLA’s post-inclusion stock price. He pointed out that Wall Street was surprised by Tesla’s Q2 2020 deliveries, and during this time, murmurs of Tesla’s S&P 500 inclusion were quickly becoming louder. Frank, who assumed that the inclusion was a pretty well understood topic in Tesla investing communities, noticed a lot of confusion and misunderstandings. That’s why he wrote the post.

The blog post is a very detailed piece which is broken down into three segments: 1) The S&P 500 and what it is, how to get included, what happens when a new stock is included, including discussion of rebalancing of the index every quarter. 2) S&P 500 inclusion case studies. 3) TSLA’s S&P 500 inclusion.

In that last category, Frank explained the big factors that will be in play during TSLA’s S&P 500 inclusion — something that, when he wrote this, many thought was going to happen earlier. As it is, fate had the shortest day of the year in mind for that date β€” seemingly trolling infamous Tesla short sellers.

Big Factors In Play

Several big factors will be in play. These are:

  • Passive Index Funds Buying
  • Active Benchmarked Funds Buying
  • Large Options Market/Delta Hedging Mechanisms
  • TSLA Price Targets
  • Speculators and Traders.

It should be noted that the following calculations will most likely be different numbers since Frank’s blog post was written before the TSLA stock split 5:1.Β 

Frank calculated that the number of shares that would have had to be bought by passive index funds was around 17.9% of TSLA’s shares. At the time of his post, that would have equaled to around 26,198,440 shares (but note that there’s been a stock split since that time). The number of active shares that he calculated for active funds benchmarked to the S&P 500 was 25.7% of TSLA’s shares.

Regarding the large options market and delta hedging mechanism, Frank noted that the effect all of that has on S&P 500 inclusion is that “any forced buying by passive and active funds will lead to more buying by market makers in order to stay delta neutral. If buying 26M shares pushed the stock to $2,200, the market makers would have to buy another $10M shares which could push the stock price up towards $2,500.”

Another factor is the TSLA price targets, which show that the opinions of the true value of TSLA are widely varied. Just recently, Adam Jonas changed his price target to include the fact that Tesla is more than just a car company β€” it’s a technology company with several startups and many of these have absolutely nothing to do with the automotive industry.

Speculators and traders, Frank pointed out, are always present and often profit from TSLA’s volatility. Their effects on TSLA will be amplified with the S&P 500 inclusion in play “because not just are some able to speculate on and front-run the S&P 500 inclusion, volatility will also likely be much higher leading up to and during the event.”

TSLA Post-Inclusion Stock Price Prediction

In this part of his blog, Frank posed three questions:

  1. At what price point are mostly institutions and to a smaller extent retail investors willing to sell enough TSLA shares for index and benchmarked funds to buy the shares they need (at least 26M+ shares)?
  2. How many additional shares will market makers have to buy to stay delta neutral during the rise in the share price.
  3. How many shorts will cover?

He noted that by looking at who the largest TSLA shareholders are, one may get a sense of the answers β€” which are pretty much impossible to answer until we actually reach that time of post-inclusion. To do that, he shared a spreadsheet of the top 60 TSLA shareholders and how many shares they hold. A quick estimation that he shared showed that institutions and mutual funds were holding 132.5 million shares at the time of his post. Elon Musk held 40 million and shorts were in the negative of 20 million. There were other holders as well — ETFs with 7.5 million, retail investors with 17.5 million, and Citadel, TSLA market maker, at 7.5 million. The total was 205 million.

One key thing that Frank pointed out was that TSLA isn’t just any high growth stock.

“It’s legitimately going after multiple multi-trillion-dollar markets, has no competition to speak of, a 10+ year-long proven track record of execution, and a leader who lands rocket in the ocean. If there’s any stock out there for which you can defend very high valuation bull cases, it is TSLA.”

If he had to guess, Frank noted that TSLA’s average stock price will end up being somewhere between $2,000 and $3,000 (pre-split) in the weeks following the S&P 500 inclusion.

Frank’s Twitter Thread & A Mystery Of 100M Missing TSLA shares

In his Twitter thread, Frank pointed out that the actual announcement showed that the committee was very much aware of TSLA’s unique nature. “I’ve never heard of an inclusion quite like $TSLA’s for two reasons,” he tweeted. The first reason is that there are five weeks between the announcement and when the actual inclusion takes place. He noted that, usually, the time ranges from a few days to around 10 days at most.

The second reason is due to the chance that the inclusion could be split into two. This is something Frank hasn’t heard of ever happening before. He noted that the main reason this could make sense is due to most of the buying index funds do are often concentrated in the days surrounding the actual inclusion. Perhaps, by splitting the inclusion into two, the committee will be able to split this concentrated buying into two as well.

100 Million Missing Tesla Shares

Frank noted that his spreadsheet, in which he keeps track of TSLA’s biggest holders, had 23% of shares that were being unaccounted for in the hands of smaller institutional and retail investors to 33%. That’s around 100 million TSLA shares. He pointed out that some of these shares could have ended up with Citadel for delta hedging purposes, and that it was possible that smaller institutional investors are holding more shares — but the numbers are not adding up. “I think there was likely somebody big buying leading up to the split,” he tweeted.

To back up his thought, Frank provided three theories.

1. There’s a new big institutional holder of TSLA shares but hasn’t yet filed their 13F.

2. There were a large number of shares unaccounted for — naked shorts who had to cover their positions leading up to the stock split. He noted that he is skeptical of the theory of the naked short.

3. A large number of index funds speculated on the inclusion back in Q3 before any official announcement took place. He noted that these funds don’t file 13Fs but NPORT-Ps, which have different deadlines and mostly aren’t filed until much later.

Frank pointed out that for the third theory, one may think that this would mean that the S&P inclusion will be “lackluster for the stock,” but he reminded us that a minimum of 130M+ shares will have to be bought by index funds at any price. Some of these 100M shares that went mission in Q3 could have ended up in the hands of market makers for delta hedging purposes.

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