GameStop stock’s potential return to the S&P 500 in the hands of an anonymous committee

Some traders are betting that GameStop could make another jump if the S&P Dow Jones index adds stocks to the S&P 500 when it rebalances later this year.

Obtaining stocks in the most widely viewed indexes is not a straightforward or predictable process. Unlike indexes including the Russell 2000, whose makeup is determined primarily by criteria including market capitalization, the S&P 500 is constructed by a committee of humans. The identities of the committee members, who are full-time employees of the S&P Dow Jones Index, are kept anonymous.

“Entering the S&P 500 is a combination of both art and science,” said Art Hogan, chief market strategist at National Securities Corp.

Committee members have certain rules that they follow when making a decision to make changes to the S&P 500. For example, companies to be added to the index must be highly liquid US firms with a market capitalization of at least $13.1 billion. In addition, the committee has the flexibility to decide on the changes.

The Index Committee has the final say on index components, which helps explain why the S&P 500 includes the 500 largest publicly traded U.S. companies — but not necessarily the 500 largest companies.

This means that companies that meet the inclusion requirements do not necessarily have a quick or easy ticket to the index.

At first glance, GameStop might seem like a likely contender.

The videogame retailer has been in tears lately. Its shares are up more than 10 times for the year, well above the S&P 500’s 20% gain.

The S&P 500 removed GameStop from the index in 2016. In August this year, GameStop moved from the S&P 600 small-cap index to the S&P 400 mid-cap index.

The rally has pushed GameStop’s market capitalization to nearly $16 billion, meaning it easily meets the minimum market capitalization requirement of the S&P 500 and existing companies such as NOV Inc., Perrigo Company and Unum Group, according to FactSet. The index is about three times the size of the components. .

According to Mr. Hogan, GameStop is also highly liquid, with at least a quarter million of its shares trading in the past six months. It has enough shares available to be publicly traded to meet the float requirement of the S&P 500.

A potential deal breaker? Companies considered for index inclusion must have reported positive earnings for their most recent quarter. Their earnings totals for the last four quarters should also be positive.

GameStop has reported losses for the first quarter of the year as well as the first three quarters of 2020. Because GameStop’s loss for 2020 was significant, it is unlikely that it will meet the requirement that its previous four quarters of earnings sum up. Positive, no matter what, as its results conclude for the second quarter. The retailer is due to report earnings on September 8.

When reached for comment, a spokesperson for S&P Global Inc., the parent of the S&P Dow Jones Index, said the company could not speculate on potential changes to the index.

Nicolas Kolas, co-founder of Datatrack Research, said he thought the S&P Index Committee would be ready to put Gamestop or any other so-called meme stock into the S&P 500.

Biggest reason? “Its valuation is not supported by fundamentals,” Mr Kolas said.

That’s not to say that GameStop’s shares can’t stop rising — they very well could, Mr. Kolas said. But if the index committee is interested in adding another retailer to the S&P 500, there are other contenders with comparable market capitalization in the S&P 400 midcap index that they may consider, such as Restoration Hardware Holdings Inc. and Williams-Sonoma Inc.

Ultimately, the index committee will probably want to prove to GameStop that it can maintain its market capitalization long enough before seriously considering the stock for inclusion in the S&P 500, Mr. Hogan said.

“While the company may be checking most boxes, it is difficult to know for how long this will happen,” Mr. Hogan said.

Why does index inclusion matter? The S&P 500 is often cited by investment professionals as their go-to gauge for the stock performance of large US companies and the health of the US economy. According to the S&P Dow Jones Indices, some $13.5 trillion is either indexed or benchmarked to the index, meaning that moving in and out of the S&P 500 has implications for money managers globally.

New entrants to the S&P 500 have often experienced brief increases in share-price after being added to the index — although research shows that gains are fleeting.

This story has been published without modification to the text from a wire agency feed