The title is a play on words from a Saturday Night Live skit with Kirstie Alley that took place in a restaurant.
The anniversary in question belongs to Google (GOOG). I have come up with a wild theory about the stock that is littered with ifs but could work out nicely.
As its one year mark since listing comes the stock can be considered for inclusion into certain indices like the S+P 500, the Nasdaq 100 and so on.
The market cap for GOOG is around $80 billion, pretty big for a stock not in the S+P 500. I think there is a chance that it will get added to the S+P 500. This is hardly a shocking revelation and of course it MAY NOT happen. If it does get added it will have about a 0.7% weight in the index and be in the top 30 in terms of cap size.
I would not be surprised if the stock, in a given twelve month period doubled in price. This is not a prediction ( because I have no idea what the stock will do) I am just saying I would not be surprised.
If it were added to the SPX and it went up a lot I think it could potentially have a dramatic impact. If, at a 0.7% weight, it doubled, it would add 70 basis points of return to the entire index. This would make beating the SPX much more difficult, for managers that are benchmarked to it,that don't own the stock.
The theory is that IF it gets included, active managers that don't buy it right away may be forced, in a manner of speaking, to buy it later. This could cause a very large move up in the stock as a secondary effect a quarter or two after, if, it gets added.
There are two obvious obstacles that I can see. First is it does not get added. The second one is Genentech (DNA). DNA's market cap is above $90 billion and it is not in the SPX. I doubt that the keepers of the index would add both at the same time, because of the beta that would add to the index. I also have to think that they would have added DNA by now if they were going to at all, but of course I could be wrong about that. After reading this paragraph I guess the two obstacles are really the same. I am sure you could come up with others.
On Aug 1 I bought GOOG at a 1%-1.5% weight for most, not all, clients. Usually 2% into a name is as small as I go. I can't imagine GOOG would disappear but if it does I won't have hurt anyone's future.
Keep in mind this is just a theory, it either works or it doesn't. If it gets added to the SPX I would expect some sort of positive initial reaction but the concept of the idea is for a longer term and bigger reaction in the price.
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3 comments:
I didn't know that DNA wasn't in the 500. Seems like a fairly big omission. I've also been hearing speculation that SNDK may be added. But I would expect GOOG and DNA would be added before SNDK. Any of the above would be a good replacement for CIEN.
I would think DNA would be the more likely addition to the S&P 500 than GOOG, IMHO. DNA could give a big lift to the expected future earnings growth of the index as opposed to GOOG. Nice post - keep up the good work!
Very odd that DNA isn't in the 500 but stuff like GTW and JDSU is.
I bet those two were added in a rather transparent attempt to get the index more techy right near the top of the bubble. There's a few other high flyers turned single digits like PMCS and the like.
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