S&P 500 Rookies: Buy or Beware?

Taking a look at the performance of new stocks added to the S&P 500 Index (SPX) ahead of Citizens Financial Group Inc's (NYSE:CFG) inclusion tonight

Jan 29, 2016 at 11:49 AM
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As recently as Monday, Citizens Financial Group Inc (NYSE:CFG) was exploring record lows south of $20. Now, the regional bank is on pace for a weekly gain -- its first of 2016 -- of 4.8%. What changed? It was announced earlier this week that CFG will join the S&P 500 Index (SPX) after the close today, replacing metal component maker Precision Castparts Corp. (NYSE:PCP), which is being acquired by Berkshire Hathaway Inc. (NYSE:BRK.A). That got us thinking -- how do stocks tend to perform after joining the S&P 500?

Since 2015, the S&P has added 30 stocks -- 28 of which have been index members long enough for us to look at their one-month returns, according to Schaeffer's Senior Quantitative Analyst Rocky White. Of those 28, only 10 generated negative one-month returns, including airlines American Airlines Group Inc (NASDAQ:AAL) and United Continental Holdings Inc (NYSE:UAL). Of the 64% of stocks that were positive a month after joining the SPX, News Corp (NASDAQ:NWS) fared the best, adding 15%. However, that could've been due to fortuitous timing, as NWS was added just before the stock market's big October rally. 

Things seem to get a little grimmer after the one-month checkpoint, though. Twenty-three of 2015's S&P 500 joiners have three-month returns, but only 11 were positive, led by Activision Blizzard, Inc. (NASDAQ:ATVI). Apple Inc. (NASDAQ:AAPL) supplier Qorvo Inc (NASDAQ:QRVO) was the worst, down 34.2% in the three months since being added to the S&P.

The stats are even uglier going out six months, with just 16 of 2015's joiners showing returns. Of those, 75% generated negative returns, once again led by QRVO. Healthcare stocks HCA Holdings Inc (NYSE:HCA) and Baxalta Inc (NYSE:BXLT) paced the advancing elite, with the latter jumping on M&A news (which means it won't be an S&P member for too much longer).

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Going back to 2010, there have been 111 S&P 500 Index additions -- the majority of which were positive one, three, six, and 12 months out. However, the three-month checkpoint is the only one in which more than half of the S&P rookies had outperformed the broader index. By one year out, just 41.2% of the 85 eligible stocks had outperformed the broader S&P. 

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In conclusion, history suggests there's no long-term payoff to investing in each new individual component of the S&P 500 Index. As White explained recently about new Nasdaq-100 Index (NDX) members: "[O]nce a stock is added to the index, it creates buying pressure ... especially among institutional investors who have funds that mimic the index." However, the added attention "raises investor awareness and expectations," which can "cause the stock price to get inflated" -- ultimately resulting in underperformance.

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