Tesla Motors Added to Nasdaq 100, The Countdown Begins

On July 8, 2013, it was announced that Tesla Motors (TSLA) would join the Nasdaq 100 starting on July 15, 2013 (PR here).  Our analysis of Tesla will follow the review and performance of additions and deletions to the NASDAQ 100 Index.

As has been well documented on our site, the Nasdaq OMX has a history of adding and deleting companies on the Nasdaq 100 Index in a manner that is consistent with a money losing speculator.  The most recent example of the NASDAQ OMX follies, prior to TSLA, was when Netflix (NFLX) was added to the index after the stock price rose +141.32%…after being dropped from the index on December 24, 2012 (PR here).  Not to be outdone by itself, the NASDAQ OMX team previously added NFLX to the Nasdaq 100 on December 20, 2010 (PR here).

Our NASDAQ OMX debrief on NFLX additions and deletion:

• Added to Nasdaq 100 on 12/20/2010: stock declines –49.32%
• Dropped from Nasdaq 100 on 12/24/2012: stock gains +141.32%
• Added to Nasdaq 100 on 6/6/2013: to be determined; up +11.98% so far

In our annual Nasdaq 100 Re-Rank Review in December 2012 (found here; includes 2010 and 2011 reviews), we pointed out that the stocks being dropped from the index typically outperform the stocks that are added to the index within the first year (our minimum benchmark).  Below is the performance of the stocks that were added or dropped since the Nasdaq 100 changes on December 24, 2012:

As can be seen in the table above, on average, the stocks that were “added” underperformed the stocks that were “dropped” by 87%.  To be fair, if we exclude the gains of Netflix (NFLX), then the gains of the stocks “dropped” from the index would fall to +31.47%.  However, this is still nearly 33% greater than the gains achieved by the stocks that were “added” to the Nasdaq 100 Index.  Alternatively, if the highest performing stocks were deleted from each group, then the gains would be +17.69% for “added” versus +31.47% for “dropped”.

We understand that the parameters for addition and deletion of companies to the Nasdaq 100 are mechanical and therefore cannot discern qualitative aspects of the stocks being included in the index.  However, individual investors should strategize around some of the demonstrated weakness and strengths of companies added to and dropped from the Nasdaq 100 Index.

Tesla Downside Targets

With Tesla being added to the Nasdaq 100 after the stock has climbed a parabolic wall of worry, it seems fitting that we are now able to project downside targets for the stock applying Edson Gould’s Speed Resistance Lines (SRL).  Below is the SRL for Tesla Motors as of July 10, 2013:

Few stocks that we have run the SRL on had such an extraordinary climb in price.  Even our Netflix SRL (found here) from December 3, 2010 had a more gradual rate of increase.  Based on Edson Gould’s SRL, TSLA has a conservative downside target of $64.56 while the extreme downside target is set at $41.77.  There is the off-chance that TSLA could go as low as $30.  However, this interpretation cannot be taken into consideration until TSLA reaches the $41 level.

Keep in mind that falling by half is not an easy task.  As was the case with our Netflix SRL from December 3, 2010, NFLX climbed +61.08% before falling below both our conservative and extreme downside targets.  We don’t short stocks based on SRL.  Instead, we consider buying stocks once they achieve our downside targets.

With Tesla Motors being added to the Nasdaq 100 Index after having an increase in price by +264% in the last six months, there will be plenty of action for this stock in the short and long-term.