The index, it is a-changin'

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UBS strategist Garry Cooper has highlighted eight stocks that satisfy the criteria for being added to the S&P/TSX composite index . Standard & Poor's makes quarterly adjustments to the index, and will announce the next changes - if any - on March 11, after markets close.

The eight stocks that Mr. Cooper thinks are ready for prime time: Legacy Oil Plus Gas Inc. , Northern Dynasty Minerals Ltd. , China Gold International Resources Corp. Ltd. , Trilogy Energy Corp. , Paramount Resources Ltd. , Southgobi Resources Ltd. , Mercator Minerals Ltd. and North American Palladium Ltd.

That's right, they are all commodity producers - suggesting that the commodities-heavy index is about to tilt even more toward miners and energy producers. Right now, materials and energy stocks represent more than 50 per cent of the index, in terms of their combined weighting within it.

While it would be nice to up the weighting of, say, health care stocks (1 per cent), consumer staples (2.4 per cent) or information technology stocks (2.6 per cent), it would seem that there is a shortage of such candidates in Canada, at least during this phase of the commodities boom. During the previous quarterly review, S&P added 11 names, including Air Canada and Dollarama Inc., which gave the index a little more diversification.

Some investors might see an advantage to buying a stock prior to its inclusion into the index, based on the theory that the index gives higher exposure to stocks and might trigger automatic buying among index funds that track the index. But we'd like to see some supporting numbers.

Anecdotally, inclusion into the Dow is often seen as a contrarian indicator, with stocks often falling flat after being tapped. Since being added in June 2009, Travelers Cos. Inc. has risen 40.1 per cent and Cisco Systems Inc. has fallen 6.6 per cent. Both stocks underperformed the Dow over the same period after dividends are factored in.

Since Kraft Foods Inc. was added in September 2009, it has risen 5.5 per cent - trailing the 19.8 per cent gain for the Dow. And since Bank of America Corp. was added in February 2008, it has slid 63.7 per cent. In fact, Chevron Corp. is the only addition that has beaten the Dow in recent years. Since February 2008, it has risen 36.2 per cent - beating the 8.7 per cent gain by the Dow.