Brian Boyle
3 min read
In This Article:
Consider it the “Hot or Not” list of the business world. And who’s not hot? Robinhood and AppLovin, for starters. At least, not quite hot enough.
Shares of both companies are slipping this week after each failed to break into the S&P 500, disappointing eager investors who thought they looked like strong candidates to get tapped for the big leagues during the index’s quarterly adjustments. Alas, they remain on the outside looking in.
READ ALSO: Retail Investors Risk Ominous Opportunity Cost With Private Investments, Moody’s Warns and Switch 2 Becomes Nintendo’s Fastest-Selling Console
Conventional wisdom says being on the S&P 500 isn’t just a status symbol. It’s one that is supposed to come with plenty of benefits. Namely: a steady rise in passive inflows, as index funds and ETFs tracking it buy up stock. It’s a major reason why both Robinhood and AppLovin saw positive share price movement through May as speculation swirled that they might be called up to the A-Team. For context: Robinhood is still up 26% in the past month, and AppLovin almost 11%, though they have slipped 3% and 8%, respectively, since the index revealed on Friday it’d be adding no new companies in its latest round of quarterly rebalancing.
That means short-term investors looking for a quick fix by betting that the companies would score S&P 500 membership — and post-membership gains — got singed by the bad news. On the other hand, research shows that scoring that shiny new credential may not mean much in the long run anyhow, despite what conventional wisdom might have you believe:
-
In a study published last year, researchers at McKinsey analyzed hundreds of companies that were added or removed from the S&P 500 and found that company’s stock prices ultimately returned to their “intrinsic value” within two months of the inclusion or removal, writing “shareholder returns drive index inclusion or exclusion, not the other way around.”
-
In fact, that temporary bump may be getting smaller and smaller. In a study titled “The Disappearing Index Effect” published last year, a pair of Harvard Business School researchers found “the abnormal return associated with a stock being added to the S&P 500 has fallen from an average of 7.4% in the 1990s to less than 1% over the past decade.”
Door Policy: To get an S&P 500 nod, companies have to meet several criteria, including having a market cap of $20.5 billion or higher and having a positive sum of GAAP net income over the four most recent consecutive quarters. Robinhood and AppLovin check those boxes, so why the rejection? One theory recently floated by Barron’s is that they’ve both been more volatile than the broader market — though that didn’t prevent the similarly volatile CoinBase from getting accepted in May. In other words: Earning a spot on the premier index is sort of like trying to enter Berghain, the popular all-night dance club in Berlin with an infamously arbitrary door policy.
This post first appeared on The Daily Upside. To receive delivering razor sharp analysis and perspective on all things finance, economics, and markets, subscribe to our free The Daily Upside newsletter.
