Five Canadian stocks are set to join the S&P/TSX Composite Index, a broad market measure of Canadian equities that drives the investment of billions of dollars in investor money.
Their good fortune comes at the expense of 11 other stocks – including the troubled cannabis concern CannTrust Inc. – that will be removed Sept. 23.
Getting picked by Standard & Poor’s Dow Jones Indices – the keeper of the 239-member Composite – is a boon for a small-capitalization stock. Data suggest hundreds of billions of dollars of money are parked in mutual and exchange-traded funds that track or mirror the Composite and its select cousin, the S&P/TSX 60 Index. Fund managers who explicitly track the index will need to buy shares of the newest members, and the stocks that get included tend to rise in the period surrounding the announcement of the changes.
The new members are three miners – Seabridge Gold Inc., Silvercorp Metals Inc. and Wesdome Gold Mines Ltd. – plus Ballard Power Systems Inc. and financial company Equitable Group Inc.
The stocks dropped, in addition to CannTrust, include eight energy companies: Birchcliff Energy Ltd.; Ensign Energy Services Inc.; Kelt Exploration Ltd.; NuVista Energy Ltd.; NexGen Energy Ltd.; Precision Drilling Corp.; Peyto Exploration & Development Corp.; and Torc Oil & Gas Ltd.
S&P also dropped Sierra Wireless Inc. and Western Forest Products Inc.
The changes will drop the total index membership to 233 on Sept. 23. S&P does not generally comment on index changes, which are made by a committee that has a fair amount of discretion.
S&P and many other index creators do not select members by market capitalization. Instead, they look at the value of shares that aren’t held by insiders and therefore trade frequently and are easily available to the public. This is called the “float.”
To stay in the Composite, a company’s float-adjusted market capitalization must be 0.025 per cent, or 2.5 hundredths of a percentage point, of the total value of the index. Practically, that means a company is in danger of being dropped from the index if its float-adjusted market cap falls below $500-million.
It takes more to get added than it does to maintain membership. The minimum for inclusion is now about $900-million.
S&P just added CannTrust in the first quarter. However, CannTrust said on July 8 it had received a non-compliance order from Health Canada for growing thousands of kilograms of cannabis in unlicensed rooms in its greenhouse facility in Pelham, Ont., in late 2018 and early 2019. The company has halted sales, had product returned by retailers and faces a criminal investigation led by the Ontario Securities Commission.
The stock hit a 52-week low of $2.10 Friday; it peaked at $15.50 in the days prior to Canadian cannabis legalization in October, 2018.
S&P already said it will add Kirkland Lake Gold Ltd. when it rebalances the S&P/TSX 60 on Sept. 23 and remove Husky Energy Inc. to do so. Kirkland Lake is up about 75 per cent this year, while Husky has declined by about one-third. Shopify Inc. and Brookfield Infrastructure Partners LP joined the 60 in March when S&P dropped two oil companies, Arc Resources Ltd. and Crescent Point Energy Corp.