Joining the Nasdaq-100 Index Might KILL Facebook’s Stock

by Jeff Reeves | September 7, 2012 10:46 am

I’ve read a lot of hooey lately about whether Facebook (NASDAQ:FB[1]) will see a pop if and when it is added to the Nasdaq-100 Index (NDX). So like the reliable gopher I am, I decided to do the legwork for all the pundits and armchair investors out there by actually looking at the data.

The short answer: There is almost no correlation between joining the index and seeing big gains. In fact, there’s a better chance that joining the Nasdaq-100 might be a kiss of death for FB.

Surprised? Well, I’ll admit the theory behind a bounce in any stock that joins this index is logical. The list is composed of the 100 largest non-financial stocks listed on the Nasdaq. Simply by joining this index, a company would have to see institutional buying pressure from the mutual funds and ETFs that rely on this benchmark.

Right?

Not quite.

Take the addition of Chinese travel site Ctrip.com (NASDAQ:CTRP[2]) and video giant Netflix (NASDAQ:NFLX[3]) at the end of 2010. They’re down 58% and 68%, respectively, since joining the Nasdaq-100 — and Ctrip actually has already been given the boot!

Another ugly addition is Green Mountain Coffee Roasters (NASDAQ:GMCR[4]), which joined the Nasdaq-100 in May 2011 and has since plummeted about 68%.

nasdaq100 Joining the Nasdaq 100 Index Might KILL Facebook's StockHere’s a complete rundown of the last 20 additions and subtractions to the Nasdaq 100, dating back to late 2010.

Frequently, joining the list means the ride is over.

All in all, of the 20 stocks I looked at, only three additions to the Nasdaq-100 have significantly outperformed the benchmark itself since joining. Those would be Dollar Tree (NASDAQ:DLTR[5]), up 67% vs. 27% for the NDX; Whole Foods (NASDAQ:WFM[6]), up 97% vs. 27% for the NDX; and Alexion Pharmaceuticals (NASDAQ:ALXN[7]), up 118% vs. 21% for the NDX.

A fourth, Avago Technologies (NASDAQ:AVGO[8]), slightly outperformed with 34% gains vs. 28% gains for the NDX … but that’s it.

Worse than the fact that just four out of 20 outperformed is the fact that seven of 20 additions are in the red since joining the index — while the NDX has been steadily moving higher.

When you think about it more, this actually makes sense. After all, companies often can soar based on fashionable investor interest — and if you’re picking an index based mostly on the market cap of a company, it’s natural that you’ll occasionally be “buying a top” when you cherry-pick big names. The fact is shrewd investors bought the company when it was a small-cap stock, and oftentimes they are ready to cash out once it makes the Nasdaq-100’s radar screen.

What I found most fascinating, however, was the performance of those kicked out of the NDX club. Though as a group they performed worse, there actually were more outperformers in the outcasts — five of 20, including Dish Network (NASDAQ:DISH[9]), which almost doubled since leaving the index, and Illumina (NASDAQ:ILMN[10]), up 65% since departing the Nasdaq-100.

I guess the herd mentality swings both ways. Once investors give up on a company that has lost its luster, that’s sometimes an opportunity to buy a turnaround story for a decent profit. Not always, of course, as big losers like Logitech (NASDAQ:LOGI[11]) and NII Holdings (NASDAQ:NIHD[12]) show in painful detail. Still, the turnaround trend is worth noting because it proves that you might have a better chance beating the market by buying a bargain booted out of the Nasdaq-100 than piling onto the latest NDX joining.

Facebook is, of course, a unique case. It has no history, unlike a Netflix that obviously saw a huge run-up thanks to years of buying pressure. It also is in a very steep tailspin since its spring IPO, so it’s pretty silly to characterize it as a momentum darling set to crash like NFLX or Green Mountain.[13]

But the point is worth making that joining the Nasdaq-100 isn’t all it’s made out to be by some pundits. A $40 billion market cap ensures it makes the cut (even if that number is about half where it briefly traded before the Facebook IPO fell apart[14] in a matter of days), so you can be sure FB will join the index eventually.

Just don’t expect any fireworks.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[15] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

Endnotes:
  1. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  2. CTRP: http://studio-5.financialcontent.com/investplace/quote?Symbol=CTRP
  3. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  4. GMCR: http://studio-5.financialcontent.com/investplace/quote?Symbol=GMCR
  5. DLTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=DLTR
  6. WFM: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFM
  7. ALXN: http://studio-5.financialcontent.com/investplace/quote?Symbol=ALXN
  8. AVGO: http://studio-5.financialcontent.com/investplace/quote?Symbol=AVGO
  9. DISH: http://studio-5.financialcontent.com/investplace/quote?Symbol=DISH
  10. ILMN: http://studio-5.financialcontent.com/investplace/quote?Symbol=ILMN
  11. LOGI: http://studio-5.financialcontent.com/investplace/quote?Symbol=LOGI
  12. NIHD: http://studio-5.financialcontent.com/investplace/quote?Symbol=NIHD
  13. momentum darling set to crash like NFLX or Green Mountain.: http://investorplace.com/2012/05/when-momentum-stocks-lose-their-mojo/
  14. the Facebook IPO fell apart: http://investorplace.com/ipo-playbook/wall-streets-egomania-killed-facebooks-ipo/
  15. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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