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Tesla surges as fund managers face big decision: How much to own

(Reuters) — Love it or hate it, a much broader universe of portfolio managers will soon have to take a stance on Tesla s stock, which surged 8% on Tuesday following the announcement that it will join the S P 500.

The electric car maker s stock market value shot up about $ 40 billion on expectations that Tesla s inclusion in Wall Street s most-followed U.S. stock index in December, announced late on Monday, will force passive funds tracking the index to buy over $ 50 billion of its shares.

Its inclusion will also force actively managed funds that try to beat the S P 500 to grapple with a question many have avoided for years: whether to own shares of Wall Street s most controversial companies, and if so, how many?

«Tesla is a very under-owned stock across actively managed funds,» said King Lip, chief investment strategist at Baker Avenue Asset Management in San Francisco, which owns Tesla shares.

«If Tesla starts to take off … and if they don t own Tesla, then they are going to underperform by a pretty meaty amount,» he said.

Many fund managers until now have avoided Tesla, according to Lip, because its low profitability and high debt exclude it from screening lists drawn up by fund managers considering new investments.

Refinitiv Eikon data shows that, excluding index funds, about 700 investment funds own or recently owned Tesla, compared to over 2,100 funds owning Johnson Johnson JNJ.N, an S P 500 component with a value similar to Tesla.

Up over 400% in 2020 року, the California-based car maker has become the most valuable auto company in the world, by far, despite production that is a fraction of rivals such as Toyota Motor 7203.T, Volkswagen VOWG_p.DE and General Motors GM.N .

Entry to the S P 500 will put Tesla among the index’s 10 most valuable companies, larger than JPMorgan Chase JPM.N and approaching the value of Visa V.N .

Many investors believe Tesla s stock is in a bubble, and some have warned against adding it to the S P 500 at current levels. Adding to uncertainty around Tesla is Chief Executive Elon Musk, viewed by many as a genius entrepreneur, but who in 2018 agreed to pay $ 20 million and step down as chairman to settle fraud charges.

With Tesla in the S P 500, actively managed funds that avoid its shares will risk falling behind if Tesla s blistering rally continues. On the other hand, they may find themselves ahead if they keep the company out of their portfolios and the stock s high-flying performance reverses.

«Many active managers shadow the S P 500, so this makes it more difficult for them to ignore Tesla,» said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.

Krosby compared Tesla s inclusion in the S P 500 to China s gradual addition in recent years to MSCI s widely tracked equity benchmarks, which led global investors that rate their performance against those indexes to pour hundreds of billions of dollars into the country s stock markets.

Adding companies with extremely high stock market values ​​to the S P 500 is exceedingly rare, and S P Dow Jones Indices said Tesla s addition will generate a massive amount of trading by index funds. To ease its addition, S P Dow Jones Indices said it may add Tesla to the index in two parts, with the company fully added as of Dec. 21.

«Many so-called active management funds are benchmark huggers and now they re going to have to tinker with what weighting to apply» to Tesla, said David Barse of index company XOUT Capital. «Many of them are going to realize they have to add it.»

Reporting by Subrat Patnaik and Sruthi Shankar in Bengaluru, Noel Randewich in San Francisco and David Randall in New York; Editing by Ira Iosebashvili, Dan Grebler and Aurora Ellis

Aurora leads cannabis sector rally fueled by hopes for reform under President-elect Joe Biden

News that Mexico s senate has approved a cannabis legalization bill offers further boost to battered sector

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Aurora Cannabis Inc. led a rally in the weed sector Tuesday, that was fueled by hopes President-elect Joe Biden, finally cleared to move ahead with his administration s transition, will push for reforms that will let companies access banks and capital markets.

There was further excitement about the news that Mexico s Senate has approved a cannabis bill that would create the world s biggest single market if it also passes the lower House of Congress.

Aurora ACB, +0.15%, ACB, +0.60% the most widely held stock on trading app Robinhood, soared 21% after Biden was cleared by the General Services Administration to begin the formal transition process, the first move by the Trump administration acknowledging Biden s election victory. The Cannabis ETF THCX, -0.37% rose 6%.

Media called the election for Biden on Nov. 7, but incumbent President Donald Trump has refused to concede, has made unsubstantiated claims that there was election fraud and attempted to sue state electoral officials and others. The GSA move now clears the way for Biden to start to coordinate his pandemic response with current administration officials and to receive security briefings.

Biden and his Vice President Kamala Harris are widely held to be more in favor of reforming the U.S. s strict cannabis laws which continue to classify the substance as a Schedule I drug, alongside heroin. That classification has hampered the development of the sector which is confined to those states that have legalized cannabis for medical or recreational use and kept companies locked out of the federally insured banking system.

«What we really need is a loosening of regulations,» said Rob DiPisa, co-chair of the Cannabis Law Group at law firm Cole Schotz. «We need legislation similar to the SAFE banking act to permit cannabis companies to have access to banking and insurance.»

Hopes for reform were also boosted by the success in November ballots of cannabis measures in New Jersey, Arizona and South Dakota, where voters approved adult-use cannabis, and Mississippi, where they voted for medical cannabis. Those measures mean about a third of Americans now live in states that have legalized cannabis for recreational use.

Stocks were also boosted by the news of Mexico s legalization bill, which comes after months of delays. Mexico is taking a new approach to its drug problem, which has seen about 250,000 of its citizens murdered by drug cartels ever since a government crackdown started under former President Felipe Calderón.

«The pending law still faces some hurdles before doors are fully open to business opportunities in Latin America s second-largest consumer market,» Benchmark analyst Mike Hickey wrote in a note.

Mexico will be the third country in the world to fully legalize cannabis after Canada in 2018 and Uruguay in 2013.

Elsewhere in the sector, Canopy Growth Corp. CGC, -0.81%, WEED, -0.48% the biggest cannabis company by market cap, was up 9%, and Cronos Group Inc. CRON, +0.76% CRON, +0.80% was up 9.1%. Tilray Inc. TLRY, +1.33% was up 16% and Aphria Inc. US: APHA CA: APHA was up 7%.

GrowGeneration Corp. GRWG, -0.07% shares rose 6%, after a bullish note from Stifel analysts led by Andrew Carter. Stifel came away from a meeting with Grow Generation s management with an improved view of the company s «differentiated growth profile and real scarcity value for directly investing behind the growth of the cannabis category.»

The company is well positioned to achieve $ 1 billion sales in the next three to five years, while building a network of 250 stores.

«GrowGeneration s positioning in the hydroponics category, and the opportunities / risks of U.S. federal cannabis reform, «they wrote. «We continue with our Buy rating and $ 32 target price.»

Cannabis software provider Akerna Corp. KERN, -1.98% was up 5%, GW Pharma PLC US: GWPH was up 3% and Aleafia Health Inc. ALEAF, was up 7%.

The Cannabis ETF THCX, -0.37% remains down 3.6% in the year to date, while the SP 500 SPX, -0.91% has gained 12%.

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