3 Growth Stocks That Could Join the S&P 500 Next

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On March 1st of this year, S&P announced that Super Micro Computer ( Nasdaq: SMCI ) would be joining the S&P 500. Within three days, its stock had jumped 28%. With trillions of dollars invested in passive indexes following the S&P 500, index inclusion can be a big catalyst for stocks. We review why Block ( NYSE: SQ ), Palantir ( NYSE: PLTR ), and Workday (Nasdaq: WDAY) are all top candidates to join the S&P 500 in September.

Key Points

• If you're interested in tech stocks, make sure to grab a copy of "The Next NVIDIA ." It's a brand-new report created by 24/7 Wall St. that features research reports on three AI stocks that could see their stocks take off from trends in the space. One of them could be joining the S&P 500 soon as well!
• The S&P 500 has requirements for stocks to enter it that include: a majority of assets in the US, an $18 billion-plus market capitalization, a high public float, trading volumes, and profitability.
• Three tech stocks that fit these criteria include Block, Palantir, and Workday.
• The S&P 500 rebalances quarterly. In June CrowdStrike , KKR , and GoDaddy joined the index.

Why Square, Palantir, and Workday May Join the S&P 500 Next

https://videos.247wallst.com/247wallst.com/2024/07/3-Growth-Stocks-That-Could-Join-the-SP-500-Next.mp4

You'll find key highlights from the discussion with 24/7 Wall St. analysts Eric Bleeker and Austin Smith below.

• On March 1st of this year, S&P announced that Whirlpool and Zions Bancorporation would be removed from the S&P 500 index.
• It was announced Super Micro Computer and Deckers Outdoor would be replacing them.
• Super Micro Computer had closed on March 1st trading for $905.48 per share. By the end of the next trading day, it had jumped to $1,074.34. That’s a jump of 19% in a single trading day. Three days later it was trading for 28% more than its pre S&P 500 announcement price.
• An addition to the S&P 500 clearly matters. The question is which technology stocks could be the next candidates for inclusion.
• Why does S&P 500 inclusion often drive such gains in share price? Simply put, a lot of money tracks the index.
• The SPY ETF which tracks the S&P 500 has $559 billion in AUM alone. The VOO from Vanguard has $1.18 trillion in assets. Those are just two indexes tracking the S&P 500 as a broad market measure.
• In the near term, addition to the S&P 500 can drive share price gains. In the long run, it can also smooth share price volatility as well.
• So, it’s not surprising investors are looking for stocks that can join the S&P 500.
• Like stock splits - it’s not the reason to own a stock, but if there’s one you’re already considering, this could be the “cherry on top.”
• Now, contrary to popular belief, the S&P 500 isn’t just the 500 largest stocks. There are specific rules for inclusion.
  • First, a company must be a U.S. company, or at least have a majority of assets in the U.S.
  • Second, it must have a market capitalization above a certain level - this number moves but is currently at $18 billion.
  • Third, the stock must have a high public float.
  • Other considerations: a stock must have minimum volume limits, trade on the NYSE or Nasdaq, and can’t fit certain legal structures like MLPs, closed-end funds, royalty trusts, or ADRs.
  • And finally, this one is very important: the company must be profitable in its most recent quarter and across the past year. This requirement has blocked many technology companies in the past.
  • Then if a stock has met those requirements, inclusion is decided by an investment committee.
• What are some tech stocks that fit this profile?
• Let's discuss Block.
• It has a market cap that currently stands at around $44 billion and it had $471 million in profits last quarter. While Block lost money in the second and third quarters of 2023, its recent profits leave it profitable across the past 12 months.
• It seems to check all the boxes and appears to be a strong candidate.
• Next up is Palantir .
• The company’s market cap is $64 billion, which is even larger than Block. It has produced $299 million in profits across the last twelve months and also seems to check all the important criteria.
• Finally, we’ll throw in Workday. A lot of investors expected this stock to be included in the last round of S&P additions, but it didn’t make the cut.
• Workday is worth $61 billion and has $1.5 billion in trailing profits - even if you back out the large impact of an income tax benefit, they’re at $472 million in operating profits.
• Now that we’ve got these three names, it's worth mentioning the S&P 500’s next rebalance should come on the third Friday of September. However, an announcement would come before that date.
• We’d rank the likelihood of inclusion at 1.) Workday 2.) Palantir 3.) Block. It all just depends on how many stocks are being removed from the index and whether candidates from other industries might emerge.

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Transcript:

Eric, I want to talk about the S&P 500 index, and I want to actually go back in time very briefly.

On March 1st of this year, the S&P announced that Whirlpool and Zions Bank Corporation would be removed from the index and that the stocks taking their place would be Supermicrocomputer and Decker's Outdoor.

Supermicrocomputer had closed on March 1st trading for $905 per share.

And by the end of the next trading day, it jumped all the way to $1,074 per share.

So that's much above 19% in a single trading day.

That is enormous, especially for a company of that size.

Three days later, it was trading for 28% more than its pre-S&P 500 announcement price.

So clearly, in addition to the S&P 500, it matters.

And we know that because it generates some forced buying.

People have to go in and get shares to match their index funds and their mutual funds, which track the S&P.

But my question is a little more forward-looking.

Which technology stocks could be the next candidates for inclusion?

Because everybody would love to get one of those 19% pops in a single trading day simply by being included in the S&P.

So which tech stocks are looking like they could be next?

Yeah, you know, Austin, like you said, there's a lot of money trading indexes or following indexes, I should say.

And one of those most recent stocks was Super Micro.

Well, the SPY ETF, which tracks the S&P 500, it's got $559 billion in AUM alone.

The VOO, or V-O-O from Vanguard, it has 1 trillion with a T, 1.18 trillion in assets.

So we're talking serious money here.

This is passive money following along with the stocks in the index.

So it's not surprising that investors are looking for stocks that can join the S&P 500.

Now, this is a situation like stocks splits a little bit, Austin, right?

We've been talking about Nvidia jumped 50% in the month after announcing its stock split.

Broadcom jumped 22% in the days prior.

We've said about those companies, the possibility of a stock split isn't the singular reason to own it, but it's a nice cherry on the top if you're looking at the stock regardless.

So when you're looking at stocks, if any of these have caught your eye, their inclusion into an index could be a catalyst in addition to potentially being just good company.

So what kind of requirements does a company need to be added to the S&P 500?

Well, first of all, it must be a U.S. company or at least have a majority of assets in the U.S.

Second, it must have a market capitalization above a certain level.

In the current climate, that's about $18 billion.

Third, the stock must have a high public float.

And some other considerations, stock needs, minimum volume limits, trading on major index like NYSE or NASDAQ.

And it can't be certain legal structures like MLPs, closed funds, royalty trusts, et cetera.

And finally, here, this one's important.

The company must be profitable in its most recent quarter or across the past year.

This is a requirement that's blocked a lot of technology stocks historically.

And once you've met all those requirements, you still need to pass a committee, which makes the final decision.

So let's talk about what stocks fit this profile.

The first one I want to talk about is Block.

Its market cap currently stands at $44 billion as we filmed this video, had $471 million in profits last quarter.

Well, Block lost money in a couple quarters across the past year.

Its recent profits leave it profitable across that 12-month timeframe.

So it checks all the boxes and appears to be a very strong candidate.

Next up is Palantir.

I'll give everyone watching a little spoiler.

If you get the next NVIDIA report, Talenteer is going to be in there because of its exposure to AI and its opportunities in the space.

As a market cap, as we filmed this, of about $64 billion, which is even larger than Block, it has produced $299 million in profits across the last 12 months.

So once again, it's checking the right boxes.

Finally, I'll throw in Workday.

A lot of investors actually expected this stock to be included in the last round of S&P 500 additions.

It didn't make the cut.

It's worth about $61 billion.

It has $1.5 billion in trailing profits.

Even if you back out the large impact of some income tax benefits, they're looking at about $472 million in operating profits.

So there are three names I think are worth mentioning as strong candidates for the S&P 500's next rebalance.

This happens on the third Friday of September, but it's important to note an announcement would come before that date.

somewhere around September 1st, if we look at historical trends.

Personally, I'd rank the likelihood of inclusion at number one, Workday, two, Palantir, both very strong additions.

Block, probably a little bit behind them.

It all just depends, too, on how many stocks are being removed from the index and what other candidates from other industries beyond tech emerge.

But I think a very strong case, particularly for Workday and Palantir.

Eric, I love this list.

And one of the points that you made, which I'd love to home in on here, is that there can be turnover in the S&P 500 when a company has declined below that market cap threshold.

And as we know, although the S&P 500, on average, has had a great year, that's largely been driven by the 977.

and the strong outperformance of a couple of exceptional tech stocks in the S&P.

And when you strip a lot of those positions out, you actually have a lot of underperformers for the year.

The S&P is, I believe, flat for the year, ex-tech.

It might even be slightly negative for the year after daylight today.

So what we're seeing is that there might be a lot of companies that have now fallen below that market cap threshold.

And you could see a lot more turnover in the S&P 500 than we have historically, which might mean not just room for one, but maybe all three of the stocks that you've mentioned today.

Yeah, definitely.

It's awesome.

Like we said, it's becoming one of the larger catalysts you can find from these kind of robotic rules created from passive investing.

So I encourage everyone out there, put all three stocks on your radar.

It's definitely a very nice tailwind.

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