Becoming part of the index forces funds trying to match its performance to buy the stock. Being dropped from an index forces the same funds to sell the stock.
Palo Alto rose 5% on the news, or $10 per share. It opened June 5 at $217, a market capitalization of roughly $69 billion. Palo Alto is replacing DISH Network (NASDAQ:DISH), which fell nearly 3.5% on the news. DISH opened at about $7 per share, a market cap of about $3.8 billion.
What the S&P Means
Inclusion or exclusion from a market average isn’t a business event, but it is an investment event. As investors increasingly move to buy index funds, stocks that are added to an index become buys and those dropped become sells. But it’s a short-term phenomenon.
The longer-term phenomenon is what has already happened. Companies that are being promoted have been growing, and their stocks generally rising. Those that are being demoted have been doing poorly, their stock prices falling.
Below Palo Alto, the S&P MidCap 400 and SmallCap 600 are also undergoing changes. Expect companies added to these indexes to rise and those being deleted to fall.
Among the stocks being added to the MidCap index are Dropbox (NASDAQ:DBX), Planet Fitness (NASDAQ:PLNT) and ZoomInfo Technologies (NASDAQ:ZI). All are up about 2-3% at the time of writing. Those being dropped, like John Wiley & Sons (NYSE:WLY), SunPower (NASDAQ:SPWR) and Victoria’s Secret (NASDAQ:VSCO), can expect selling pressure. Wiley is down 29% in the last year. SunPower is down 41%, and Victoria’s Secret is down 48%.
What Happens Next?
Promotion and demotion lists reflect longer-term changes at companies but can provide a short-term pop to the promoted sides.
At the time of publication, Dana Blankenhorn did not hold (either directly or indirectly) any positions in securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.