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What to Expect From Tesla Shares After Joining QQQ

July 10, 2013 1:59 pm
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What to Expect From Tesla Shares After Joining QQQ

Electric car maker Tesla (NASDAQ: TSLA) is no stranger to fanfare. The company and its high-flying shares got a little bit more of that on Monday evening when NASDAQ OMX Global Indexes announced the stock will replace Oracle (NASDAQ: ORCL) as a member of the NASDAQ-100 Index (NASDAQ: NDX).

Tesla will join the NASDAQ-100 and the NASDAQ-100 Equal Weight Index (NASDAQ: NDXE) on July 15 making the stock eligible for inclusion in ETFs such as the PowerShares QQQ (NASDAQ: QQQ) and the First Trust NASDAQ-100 Equal Weighted Index Fund (NASDAQ: QQEW).

As a story stock, Tesla is also a controversial stock. Critics say the valuation is stretched. Supporters say the company is revolutionizing the auto industry. No matter what one’s feeling are about Elon Musk’s company, chances are those feelings are strong. An almost 32 percent short interest as of mid-June despite the fact that the shares have tripled in the past 90 days says as much.

Investors are even arguing whether or not the move to the NASDAQ-100 is already priced into shares of Tesla. Maybe it is, assuming the fund managers that benchmark to that index have already bought exactly the amount of Tesla stock they need to be inline with index parameters.

Those looking for clues regarding the impact a jump to the NASDAQ-100 and QQQ can have on a stock just need to go back to December when 10 additions and subtractions to the index, and subsequently the ETF, were made.

The following 10 stocks became members of the NASDAQ-100 on December 24, 2012: Analog Devices, Inc. (NASDAQ: ADI), Catamaran (NASDAQ: CTRX), Discovery Communications (NASDAQ: DISCA), Equinix (NASDAQ: EQIX), Liberty Global (NASDAQ: LBTYA), Liberty Media (NASDAQ: LMCA), Regeneron Pharmaceuticals (NASDAQ: REGN), SBA Communications (NASDAQ: SBAC), Verisk Analytics. (NASDAQ: VRSK) and Western Digital (NASDAQ: WDC).

Over the month that followed, all of those stocks rose with Regeneron being the worst performer with a gain of 0.6 percent. Western Digital was the best, gaining 14.3 percent. The NASDAQ-100 is re-ranked each year in December, timed to coincide with the quadruple witch expiration Friday of the quarter, according to NASDAQ OMX Global Indexes.

None of those stocks are prominent members of QQQ. Combined, the 10 represent less than 3.8 percent of the ETF’s weight with Regeneron receiving the largest weight at 0.54 percent. Said another way, Cisco (NASDAQ: CSCO) alone accounts for almost 3.9 percent of QQQ.

Based on a current market cap of $14.1 billion, if Tesla was a QQQ holding today, it would have slightly less of an impact on the ETF than Analog Devices. That stocks has a weight of 0.41 percent in the ETF, according to PowerShares data.

It is safe to say that Tesla’s inclusion in a particular index is not going to do anything about the stock’s valuations or motivate any to buy or not buy its cars. And although the stock has been on fire, Tesla bulls may want to see the stock booted from the index. Why? Because Netflix (NASDAQ: NFLX) almost doubled in the first quarter of this year after being removed from the NASDAQ-100 last December. The stock has since rejoined the index. Green Mountain Coffee Roaster (NASDAQ: GMCR) was removed with Netflix and has not rejoined the NASDAQ-100. That stock is up 67 percent this year.

For more on ETFs, click here.

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