The Outcasts: Stocks Removed From the S&P 500
While companies celebrate inclusion into the S&P 500, for every company added, one must be removed. Many analysts have observed an “index effect,” an initial price boost after the announcement of a stock being added as well as a decline for stocks removed for reasons other than a buyout or merger. However, William Hester (www.hussmanfunds.com) observed that when you examine full-year performance, portfolios of stocks removed from the index for reasons other than buyouts outperformed those of added stocks. He points out these neglected and underappreciated stocks may have “more life left in them than most investors expect.”
This issue’s First Cut focuses on firms that have been removed from the S&P 500 index for reasons other than being bought out, taken private, or redomesticated outside the United States. The First Cut listing indicates when and why a stock was removed from the index. Companies must currently have a minimum market capitalization of $3.0 billion for inclusion in the S&P 500. Most companies in the table were removed because they became too small. Some were relocated to other S&P indexes, while others were completely dropped. Hester’s study found that stocks taken out of the S&P 500 and not placed in the MidCap or SmallCap index outperformed those that were relocated. The listing includes the earnings for the most recent year and the consensus estimate for the current fiscal year to measure near-term profitability. The ratio of total liabilities to assets is a simple measure of financial leverage. The 52-week price change highlights recent stock market performance.
As Hester observed, not all outcast stocks go on to outperform. Some companies subsequently filed for bankruptcy, leaving stock investors with nothing. However, a contrarian may find a few true bargains among these outcasts.
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