November 18, 2020

Market recap

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Top Story

Why Tesla’s Debut on the S&P 500 Matters

A Quick Review

Earlier this week, news broke that Tesla (TSLA) will join the S&P 500 on December 21. Investors had hoped the electric car maker would earn a spot in the S&P 500 in September after it reported a fourth consecutive profitable quarter, meeting an important requirement for joining the index. However, the S&P Index committee does not automatically include companies once they have met requirements, and Tesla was not added to the index after the third quarter rebalance.

After the disappointment in September, investors are cheering this week’s news. Tesla, which was once a niche startup, has achieved important recognition from both the automobile industry establishment and Wall Street. Leading up to September, shares of the electric vehicle maker climbed about 74% as investors hoped the company would be added to the S&P. After the news that Tesla did not make the cut in September, shares fell about 14%. Now, investors are wondering what lies ahead for the company.

Investors Look Ahead

Bullish Tesla investors expect indexation to boost demand for shares of the company, along with the price of those shares. Roughly $12 trillion in mutual fund assets are indexed to the S&P 500. This means that index funds will buy approximately $100 billion in Tesla stock. This could lift the company’s share price for a few trading days. However, share prices tend to level off after index funds make their initial purchases. For context, Tesla shares bucked the negative bias yesterday, gaining 8.21%.

Joining the S&P does not guarantee that Tesla will continue to perform as well as it has this year. Bullish investors say Tesla could produce $10 billion in net income by 2022, up from the $226 million it has made over the past 12 months. On the other hand, less-optimistic investors see that the EV industry is getting more crowded and are wary that Tesla could get passed by a smaller competitor. In the late 90s, Yahoo (then YHOO, but now AABA) looked like it would dominate the search engine landscape until a lesser-known startup, Google (GOOGL) came along. Some investors worry the same could happen to Tesla.

Tesla Will Be the Largest Company Ever Added to the Index

Tesla, which has a market value of nearly $390 billion, will be the largest company ever added to the S&P 500. Because the EV maker is so big, if it were added all at once, index-tracking funds would need to sell over $40 billion worth of other stocks in order to make room for Tesla.

Tesla will be one of the top 10 largest stocks in the index, with a weighting of over 1%. Usually when a new company is added, it is swapped for another company of a similar size, but there is no stock that the S&P 500 could conceivably remove to offset Tesla’s entry into the index. For this reason, the S&P 500 may decide to phase Tesla into the index in stages. It’s been a winding road to the S&P 500 for Tesla, and there are likely more ups and downs ahead for the company and its investors.

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Amazon Pharmacy Is Here

Amazon Aims to Bring Transparency to the Pharmacy Industry

Yesterday, Amazon (AMZN) launched a new part of its website called Amazon Pharmacy, where customers can buy medications and pay for them with or without insurance. The lack of transparency in the pharmacy industry can sometimes be frustrating for customers, and Amazon hopes to cast some light. For every drug it sells, Amazon will show the price when using insurance and when not using insurance.

Analysts have been anticipating Amazon’s move into the healthcare industry for some time. The industry is worth about $4 trillion in the US alone. In 2018, the ecommerce giant acquired PillPack, an online pharmacy, for $753 million. However, Amazon has taken longer than many expected to integrate PillPack into its operations. Now, it seems the wait is over.

Competitors' Shares Fall

Amazon Pharmacy’s debut sent shock waves across the pharmacy industry. Shares of the two largest pharmacy chains in the US, CVS (CVS) and Walgreens (WBA), fell 8.6% and 12%, respectively, on the news. Shares of GoodRx (GDRX), an online pharmacy startup that aims to bring more transparency to the industry, slid 17%.

Amazon’s new business may also impact its brick-and-mortar competitors, like Walmart (WMT) and Target (TGT). These companies have been giving customers the opportunity to shop and fill prescriptions for years.

A Unique Moment

As COVID-19 cases reach all-time highs in the US, an increasing number of customers are receiving medications through the mail to reduce their risk of exposure to the virus. Analysts in the pharmacy industry say it tends to be difficult to make consumers switch pharmacy brands because this can involve calls to doctors, insurance complications, and other hassles that might outweigh the convenience of a new pharmacy.

However, Amazon is in a unique position at the moment. Many people have grown accustomed to the convenience of ordering other products on the site, and may be willing to put in the effort to switch their prescriptions to Amazon Pharmacy.

Taylor Swift’s Master Recordings Sell to Shamrock Capital for $300 Million

Swift’s Hits Change Ownership Again

Taylor Swift’s master recordings for her first six albums have sold to Shamrock Capital, a private equity firm, for $300 million. Shamrock is based in Los Angeles and was founded by Roy Disney, Walt Disney’s nephew.

This is the second time in a year and a half that the rights to hits like Love Story, Shake It Off, and We Are Never Ever Getting Back Together, have changed ownership. Swift says the deal was completed without her knowledge. After news of the acquisition broke, the singer announced on social media that she plans to re-record the songs on her new label. This would lessen the value of the masters Shamrock purchased.

Scooter Braun’s Return on His Investment

Shamrock’s acquisition of Swift’s recordings marks the latest development in a high-profile clash between the singer and Scooter Braun, a music manager. Last summer, Braun’s media holding company, Ithaca, acquired the entire Big Machine Label Group for just over $300 million.

The Nashville-based label signed Taylor Swift when she was a teenager. The company’s other artists include Rascal Flatts and Florida Georgia Line. With Braun selling just Taylor Swift’s music for $300 million, he is presumably making a significant return on the purchase, while still retaining the rights to the rest of Big Machine’s assets. Some industry veterans believe that the value of Swift's assets could increase to $450 million, depending on certain earn-backs.

Swift was offered the opportunity to be a partner with Shamrock, but she did not accept because under the terms of the deal, Scooter Braun will still profit off of her music.

The Value of Music Rights Surges

Over the past several decades, the rise of streaming has completely changed the structure of the music industry. Though revenue for the music industry overall has surged thanks to streaming, much of this money is funneled to music rights holders, not artists.

Currently, investors are particularly eager to buy the rights to classic songs like Swift’s hits. This is because song rights provide a dependable revenue stream that is relatively unrelated to other economic events. This type of investment is particularly attractive during moments of economic uncertainty. The deal between Shamrock Capital and Ithaca, as well Taylor Swift’s reaction to the sale, have already made waves across the music industry. Fans and investors alike will be carefully watching Shamrock and Swift’s next moves.

Not-So-Breaking News

  • Twitter (TWTR) is launching new features to compete with other social media giants. One new addition, called Fleets, will allow users to share stories for 24 hours like on Snapchat (SNAP) and Instagram (FB). Another, called Spaces, will allow users to join virtual rooms to have audio conversations. This is similar to a feature of networking startup Clubhouse.
  • Universal Pictures (CMCSA) inked a deal with Cinemark (CNK) that shortens the time movies are kept in theaters. Now, Universal movies can migrate online after three weekends in theaters, or 17 days. Prior to the pandemic, consumers generally had to wait about two-and-a-half months before a film could be watched at home. Universal struck a similar deal with AMC Entertainment (AMC), the nation's largest theater chain.
  • Warren Buffett’s Berkshire Hathaway (BRK), disclosed that during the third quarter it invested in four large pharmaceutical companies—Pfizer (PFE), AbbVie (ABBV), Bristol Myers Squibb (BMY), and Merk (MRK). The company scaled back its investments in Apple (AAPL) and some large banks. Given the positive COVID-19 vaccine news from Pfizer recently, this investment could see big returns.
  • Home Depot (HD) beat Wall Street expectations with its earnings report yesterday. The company reported that same-store sales climbed 24.1% compared to last year. Home Depot also announced it will spend about $1 billion on raising wages for frontline employees. Despite its beating estimates, shares of the company fell 2.5%.
  • Costco (COST) announced it will pay a special dividend of $10 per share to its investors on December 11. The total payout will be about $4.4 billion. The company’s balance sheet has been strong during the pandemic as people have stocked up on bulk food to avoid extra trips to the store.
  • Student loan debt can be hard to manage. But there is help with student loan debt available, through repayment plans, deferment, and student loan refinancing. Read more about the options available at SoFi Learn.

Financial Planner Tip of the Day

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Brian Walsh, CFP® at SoFi

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