Standard & Poor’s, which determines — and adjusts as needed — the index’s constituents announced another round of changes late last week.
Yes, it matters. If history is any indication, the reconfiguration of the S&P 500’s components could prove to be bullish for AMD stock … at least initially. Even down the road, though, there’s a certain credibility that comes with being part of the world’s most recognizable group of major publicly traded companies.
Coming and Going
The S&P 500 is intended to be a basket of the United States market’s biggest and most widely held 500 companies, for the purpose of serving as a barometer of the broad market’s health. It’s been estimated that the combined market capitalizations of these 500 companies makes up 80% or more of the entire market’s sum-total capitalization.
Problem: As market caps change for all publicly-traded companies, the 500 biggest names aren’t a static collection. Standard & Poor’s adjusts the S&P 500’s pool every few months. On average, the organization swaps out 22 of those companies every year.
The latest rounds of additions and subtractions took out the aforementioned Urban Outfitters, and added AMD. Also getting the boot are Frontier Communications Corp (NASDAQ:FTR) and First Solar, Inc. (NASDAQ:FSLR).
Don’t Bet on a Long-Lived Bump
On the surface, it seems as if the adjustment of the S&P 500 is little more than irrelevant bookkeeping, but there’s more to it than that. The adjustment also forces index-based mutual funds and exchange-traded funds like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) to buy or sell those stocks accordingly to better reflect the actual index makeup.
It’s no small matter, either.
It has been estimated that being added to the index means approximately 11% of that company’s outstanding shares are bought up by funds and ETFs within a matter of days.
In that light, the prospect of even more gains is a compelling one to owners of AMD stock, who have already seen Advanced Micro Devices shares rally more than 400% over the course of the past twelve months.
On the other hand, a closer look at actual post-addition performance reveals any upside is short-lived.
Perhaps the most obvious explanation is the one that blatantly applied to AMD. That is, the same heroic run-up in the stock’s price that qualified it as big enough to become part of the index in the first place makes it vulnerable to a wave of profit-taking … despite all the buying that’s sure to come soon as funds enact the adjustment.
In other words, don’t look for the rekindled buying effort to keep AMD stock moving higher at what was an unsustainable pace.
Bottom Line for AMD Stock
On the flip side, don’t assume AMD shares are doomed either.
When the dust finally settles, being added (or subtracted) from the S&P 500 isn’t a significant enough factor — for most investors anyway — to bother with. Advanced Micro Devices is still an interesting turnaround story, and that turnaround is going to drive the stock higher or lower more than anything else.
To that end, it’s worth repeating something you’re truly said of AMD several weeks ago:
“Although a turnaround is in the works, there’s still no denying AMD stock is overextended and ripe for a pullback. The market got a little overzealous about the timing of when the gradual rollout of Ryzen might actually start to legitimately help the bottom line. Don’t be shocked when investors come back to earth, and bring the stock with it. On the flipside, don’t forget to use that pullback as a buying opportunity. Advanced Micro Devices is sitting on the most marketable product it has had in years.”
That stance would still apply whether AMD stock was being added to the S&P 500.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.