Learn the 4 reasons why Tesla stock keeps risings and defies traditional market evaluations.

Tesla Car on road
Tesla Model 3 (Credit: Storyblocks)

If you’ve been tracking the news on the stock market in the past couple of months, you would have heard the name Tesla over and over again.

Since the market low of March 19th during the height of the global pandemic — this stock has made an unbelievable come back, rising 261% within this short 4 month period.

Tesla stock chart
Tesla Stock Since The COVID-19 Decline (Credit: Daniel’s Brew)

If fact, it’s even outpaced this Nasdaq Triple leveraged ETF — an ETF that’s designed to do 3x the performance of the Nasdaq composite.

TQQQ stock chart
$TQQQ Since The COVID-19 Decline (Credit: Daniel’s Brew)

And so today, we’re going to cover the 4 core reasons why this stock has been on a tear lately, what this means for Tesla going forward and why next Wednesday 7/22 is going to be a big day for this stock.

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Daniel’s Brew

Welcome to Daniel’s Brew — where I cover personal finance, investing, and career development topics.

So, let’s dive right into it!

1) Tesla Had Good Q1 Results

On 4/29/2020, Tesla reported earnings and surprised Wall Street with better than expected Q1 delivery results amidst the global pandemic.

Tesla reported that it delivered approximately 88,400 vehicles in Q1 of 2020, as opposed to the estimate of 79,900 — that analysts predicted. On that news, Tesla stock jumped 17% in after hours trading for that day — and steadily climbed ever since to the $1500+ price tag that we’re seeing today.

Ark Stock Price Prediction chart
Ark Price Targets For Tesla Stock (Credit: Ark)

In addition, Ark, a global investment firm specializing in disruptive technology — released their price targets for Tesla in the next 4 years and their bear case, is $1500, which we’ve already surpassed, their base case is $7000, and their optimistic bullish viewpoint is a whooping $15,000 share price.

Ark CEO, Cathie Wood cites Tesla’s technology as the primary driver for this projection.

What we are learning is that Tesla is just so far ahead of the pack… as far as range and other important metrics when it comes to electric vehicles.

2) New Retail Trading Volume

Next, one interesting phenomenon we’ve seen lately, has been the sudden influx of new retail traders to the stock market.

CNBC reports that retail trading is booming during this pandemic period — through a combination of perceived discounted prices in the stock market, as well as extra cash from government stimulus and extra time from the quarantine efforts. In addition, they state that trading via mobile platforms was up significantly in this period as well.

Well, clearly, one of the top beneficiary of this spike in volume and shift toward mobile trading was Robinhood — who was able to secure another $320M in funding this week as they set record numbers for new account sign-ups to their platform.

So this got me thinking, what are the most popular stocks that are traded on Robinhood? Well, I did a little search, and here’s what I found.

Robinhood popular stocks chart
RobinTrack keeps track of how many Robinhood users hold a particular stock over time. (Credit: RobinTrack)

According to RobinTrack — which is a tool that keeps track of how many Robinhood users hold a particular stock over time — in the past 30 days, the number of accounts holding Tesla stock, increased over 63% and it is currently the most popular stock on the platform by ownership.

So we can surmise here that a good portion of the Tesla stock performance can be attributed to brand new retail trading volume, with a surge in popularity of Tesla stock — within this group of new investors.

3) Massive Short Squeezes

In January of this year, studies showed, that Tesla was the most shorted stock in the US — apparently people would just love to see this stock drop!

But the problem with short selling is that if you’re wrong, and the price starts to rise rapidly, then there is no limit to how much money you can lose in this transaction. (If you didn’t fully understand this statement, then check out this video that I made here — that outlines how short selling works and the inherent dangers of this method.)

So because of this — if you’re a short seller, you generally have a very tight stop set on your position. And when a stock like Tesla starts to rapidly gain momentum in their share price — what we see is a phenomenon called a short squeeze, in which all of the short positions are rapidly closed due to these tight stops or just short selling panic in the market and the short sellers are forced to quickly buy back the stock at market prices to cover their losing positions, which helps to push the stock price upwards.

Given how much short interest there is in this stock, when Tesla share prices start running up due to the first 2 reasons I mentioned above, the short squeeze that happens only helps to accelerate the rise in the share price.

4) Tesla’s Potential Inclusion In The S&P 500

With Tesla’s meteoric rise in share price — Tesla has now become the largest auto company in the world and it’s become more valuable than companies like Toyota, Coca-cola and Disney. Additionally, Elon Musk is now apparently wealthier than Warren Buffet — which in and of itself is just shocking.

But seeing Tesla’s performance, there is a lot of speculation that Tesla could enter the S&P 500 — given that it’s missing only one more criteria needed to match the full qualifications of entry. And this coming Wednesday July 22nd, Tesla reports Q2 earnings — and if they are profitable, even by just $1, then that would be enough to satisfy all of the requirements to join this index.

Those requirements being:

  1. market cap of $8.2 billion — which Tesla way surpasses.
  2. It’s headquartered in the U.S. — no problem there.
  3. The value of its market cap trades annually — check.
  4. At least a quarter-million of its shares trade in each of the previous six months — also check.
  5. Most of its shares in the public’s hands — check.
  6. It’s been at least a year since its initial public offering — it’s been 10 years.
  7. And the sum of the previous four quarters of earnings must be positive as well as the most recent quarter — we’ve had 3 positive quarters so far, so depending on how it goes on next Wednesday’s Q2 earnings call, this might also be a “check.”

Now, for those of you that aren’t aware — entry into this S&P 500 index is a pretty big deal. The reason that is, is because the S&P 500, the DOW Jones Industrial Average, and the NASDAQ composite — make the the 3 most prominent indices in the US stock market. Essentially, those 3 measures represent the whole of how the US stock market is performing.

And as such, there are over $4 Trillion dollars held in index funds — that match the behavior of these 3 indices. And that’s the point of index funds — remember, they are designed to replicate the performance of the index, as closely as possible.

What that means is that if Tesla enters the S&P 500, all of those index funds that track the S&P 500, will now have to buy and keep Tesla stock in their holdings, in rough proportion to the weight Tesla has in the overall index, in order to maintain a composition that mirrors the S&P 500.

And when Tesla enters the index, given its market cap — CNBC reports that “Tesla would be among the most valuable companies ever added to the S&P 500, larger than 95% of the index’s existing components. It would have a major impact on investment funds that track the index.”

This means that all of those S&P 500 index funds will have to rebalance their holdings and purchase sizable quantities of Tesla stock— to be able to match the S&P 500 index going forward.

In fact, Ivan Cajic, head of index & ETF research at Virtu Financial — estimates that index managers would need to own roughly 25 million shares of Tesla stock, currently worth $34 billion.

Now think about that for a second…

25 Million shares would have to be purchased — and according to Yahoo finance, Tesla has a float of almost 148M shares — which basically means that there are 148M tradable shares of stock out in the market that are either held by retail traders, investment firms, ETFs, etc.

Tesla Stock Fundamentals table
Tesla Has A Float Of 148M (Credit: Yahoo Finance)

So what that means is these index funds need to purchase about 17% of the entire float of Tesla shares out in the open market — that’s almost 1 out of every 6 shares that’s being held in the exchange.

And that pool gets even smaller if you consider the fact that there are less of those shareholders willing to sell their positions, given all of the positive news that’s out there right now about this company. And so the speculation here is that once Tesla joins the S&P 500 — because of how much stock the index funds need to procure, there would be a heavy shift towards the demand of the stock, as opposed to the supply and the shares of this stock could skyrocket in value.

So as you can see, these are 4 key factors that have contributed to the recent upward acceleration of the Tesla stock price — and in my personal opinion, I think this trend will continue for a while.

Now, of course, the stock won’t be in the green every single day — ups & downs are part of the inherent nature of the stock market, so I’m also expecting some pull backs along the way, but in general, I’m bullish on this stock so I’ll be keeping my eyes open on any upcoming dips, to capitalize on the buying opportunity, to add more to my position.

In closing, I’m not a financial analyst or a series 6 broker and in full disclosure, I am a small position holder of this stock — though I always aim to be as objective as possible when doing this type of research.

So, as with any financial insight you see online (including this one), make sure you take it in with a grain of salt, do your own research and form your own conclusions — to determine whether or not it fits within your personal investment plan.

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**** Disclaimer *****

The content here is strictly the opinion of Daniel’s Brew and is for entertainment purposes only. It should not be considered professional financial, investment or career advice. Investing and career decisions are personal choices that each individual must make for themselves in accordance with their situation and long term plans. Daniel’s Brew will not be held liable for any outcome as a result of anyone following the opinions provided in this content.

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