Tesla is surging on its coming inclusion in the S&P 500 — here's what it means for the stock

Published Tue, Nov 17 20209:23 AM ESTUpdated Tue, Nov 17 20209:42 AM EST

(This story is for CNBC PRO subscribers only.) Shares of Tesla surged on Tuesday after S & P Dow Jones Indices announced that the company will join the S & P 500 — a historic milestone for Elon Musk and his electric vehicle company, and one that will also lead to billions of dollars worth of Tesla shares changing hands as index managers buy the stock. "We expect TSLA shares to trade sharply higher on the news," said Garrett Nelson, analyst at research firm CFRA. Tesla jumped more than 12% during early trading on Tuesday, adding more than $30 billion to its market capitalization at the opening bell. Based on Tesla's size — at its current valuation it will be among the S & P's 10 largest companies — Credit Suisse estimates that passive funds will have to buy around 95 million shares, with active managers bringing the total add to around 125 million shares. This means significant selling in other positions, to the tune of around $51 billion, according to S & P Dow Jones Indices, which said Tesla's addition will "generate one of the largest funding trades in S & P 500 history." But some believe the buying this year — shares have more than quadrupled in 2020 — was in anticipation of Tesla being added to the index, meaning any stock pop could be short lived. "Tesla's addition to the S & P 500 might be a catalyst for a lot of large investors to dump the stock and take gains," said David Trainer, CEO of investment research firm New Constructs. "The potential downside in Tesla's stock is so large that Tesla brings huge downside risk to the S & P 500 that may damage the popular passive index investing trade that has taken shape over the past few years," he added. While addition to the S & P 500 doesn't, of course, change anything about a company, it marks a right of passage of sorts. This is perhaps especially true for Tesla, which has long since divided the Street. "Clearly this is a key positive for shares and indexing purposes and ultimately removes another question mark around the Tesla story going forward," said Dan Ives, analyst at research firm Wedbush Securities. Ives, who has a neutral rating on the stock, added that the inclusion speaks to conviction around Tesla's ongoing ability to turn a profit. In October the company reported its fifth straight quarter of profits , but prior to this year it had yet to turn a profit on an annual basis. UBS noted that while addition to the benchmark does not change Tesla's fundamentals, it could lead to a wider investor base "rather than mainly tech-focused investors." In August Tesla announced a 5-for-1 stock split with the aim of making its stock, which then traded above $2,000, more accessible to investors, even though fractional trading exists meaning in theory a stock's price shouldn't be prohibitive. Tesla stock has been challenged recently, and shares have yet to regain their Sept. 1 all-time high. The s