What are we looking for?
Companies poised to enter the prestigious – and lucrative – S&P 500.
Passive investments that track, rather than attempting to outperform, the broad market are considered a relatively new trend. However, fund-industry pioneer John Bogle, who died last month, launched the first index fund in 1976. We will look for companies that could soon benefit from his financial innovation.
The two largest ETFs in both North America and Europe track the S&P 500. In North America, they are State Street’s SPDR S&P 500 and BlackRock’s iShares Core S&P 500 ETF; in Europe, the two largest are the iShares Core S&P 500 UCITS ETF and the Vanguard S&P 500 UCITS ETF. These four funds alone represent roughly US$500-billion, so a company’s inclusion in the index means a massive inflow of investment. Our screen is simple: We look for the largest U.S. companies not in the S&P 500 that have strong price momentum and thus may be added to the index soon.
For price momentum, we will use the Refinitiv StarMine Price Momentum model, which has been a good predictor of performance for U.S. stocks recently. Over the past month, the top 10 per cent of companies not in the S&P 500, according to the model, have outperformed the bottom 10 per cent by 4.3 percentage points. The model considers short-, medium- and long-term momentum as well as the momentum of the company’s industry. We will look at the industry, medium-term (ratio of 10-day to three-month average close) and long-term (ratio of six-month to 12-month average close) components, and require a percentile score of at least 70 for all three.
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What we found
The five largest companies that fit the criteria above are listed in the accompanying table. Income-oriented investors will be encouraged by the high forecast dividend yields, but the largest company on the list – petroleum refiner CVR Energy Inc. – could also benefit from new legislation. The International Maritime Organization (IMO) will enforce a cap on sulphur content in marine fuel of 0.5 per cent, down from the current 3.5-per-cent cap today, by 2020. The new rule, IMO 2020, should benefit U.S. refiners whose lighter, “sweeter” oil is naturally lower in sulphur than European or Canadian oil.
Hugh Smith, CFA, MBA, is an investment management specialist at Refinitiv.