Advance Auto Parts (AAP) will join the S&P 500 after the close of trading Wednesday, and although it’s already too late to take advantage of any short-term bump on the news, it’s still a welcome development in an otherwise volatile and disappointing year for AAP stock.
The auto-parts retail chain will take the place of Family Dollar Stores, which was swallowed up by Dollar Tree (DLTR).
AAP is actually a good choice for maintaining the balance of the S&P 500.
Like the name it replaces, AAP is a consumer discretionary stock and has a similar market capitalization in light of the value of the total index, or about $12 billion vs. $9 billion for Family Dollar.
But that’s not what matters to holder of AAP stock. Being added to the S&P 500 always gives a stock a short-term boost and a longer-term tail of demand because so many assets are benchmarked to the broad market index.
Any passive mutual fund or exchange-traded fund that tracks the benchmark index now has to purchase shares in Advance Auto Parts in order to remain faithful to the index, and that’s just the tip of this index iceberg.
Indeed, approximately $7.8 trillion is now benchmarked to the S&P 500, according to S&P Dow Jones Indices. More than $2 trillion of that figure is directly indexed through ETFs, mutual funds and other investment products.
AAP Stock’s Short-Lived Pop
Those figures explain why AAP stock jumped when news broke that it was getting promoted to the most important measure for U.S. equity performance. Traders are front-running what promises to be a fountain of demand, buying AAP stock and then selling it at a higher price to all the passive products that eventually have to own it.
AAP stock jumped in after-hours trading Monday and has already started to cool off. In the regular session Tuesday, AAP had dipped into the red as of this writing.
Retail investors typically can’t compete with professional traders when it comes to pouncing on a stock named to the S&P 500, but it’s still good news for anyone holding AAP stock. The demand for shares won’t be exhausted in a day, and being a member of the benchmark index does add a small measure of cache.
The news also comes at a good time for Advance Auto Parts, which has gone on a tear over the last couple months after a bumpy and disappointing start to 2015. Shares are up 13% from their May lows vs. a slightly negative S&P 500.
True, the company missed Wall Street’s first-quarter earnings estimate and cut its full-year outlook, but that was due to costs associated with the integration of General Parts, which it bought last year.
Apparently, the market is willing to look past any short-term hit to the bottom line and focus on the benefits of expansion at a time when cheap gas has motorists driving more miles.
AAP stock doesn’t look particularly expensive, going for 17 times forward earnings on a compound growth forecast of 13%, but it’s probably not the strongest name in the sector.
That doesn’t really matter now, however. AAP is headed for the S&P 500, and that means most investors will own a piece whether they want it or not.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
