Tesla just had its worst day in history – its share price plunged over 21% in one single trading day, as Nasdaq 100 sold off. The big tech companies suffered together, with the market slashing trillions in market capitalization, and everyone was happy by the time the closing bell came, as the pain ended for the day.
Many will say that it comes as no surprise and that the Tesla share price was due for a correction. While this may be true, let us put things into perspective and not forget that Tesla is still up over 625% on the year. Moreover, it went through a stock split and even raised five billion dollars by issuing new stock.
S&P 500 Inclusion Denied
One of the reasons responsible for Tesla’s major decline is the failure to be included in the S&P 500. Some passive managers that traded in anticipation of the announcement were forced to rebalance their portfolios again – literally adding fuel to the fire.
Instead of adding Tesla, the S&P500 added the online retailer Etsy, the medical technology company Catalent and Teradyne (a semiconductor equipment manufacturer). Coty, Kohl, and H&R Block Inc. were replaced.
All three companies added to the prestigious index gained on the news. This is exactly what drove the Tesla price higher in the last weeks, so the S&P announcement came as a surprise. However, it does not mean Tesla will not make it into the index. Only, not now.
Another blowout came from GM’s announcement that it invested in Nikola, an electric truck manufacturer. Nikola jumped on the news while Tesla continued to tank for the rest of the day, erasing $82.1 billion of market cap.
Last but not least, one of the most respected analysts on Wall Street reiterated an underperform rating on Tesla’s stock. More precisely, Bernstein’s analyst calls for a fair price in the range of $180, especially if we consider the stock split. If the pace of the decline continues, another split comes in a natural way.
Once again, irrational exuberance is punished on the first chance bears have. When one of the holdings in your portfolio loses a fifth of its value, suddenly traders become investors. The only way to look to make up for the lost ground is to let time pass – assuming the time horizon is not a limitation when constructing the portfolio.