In any givenyear , Standard & Poor's must find a dozen or
so new companies to include in its vaunted S&P 500index .
Existing components invariably get acquired, or stumble so
badly that they are disinvited from this select group. Getting a
tap on the shoulder from S&P is great news, simply because
the billion-dollar S&P 500 indexfunds must immediately buy
theirshares to give them a proper weighting.
Analysts atCredit Suisse recently gave the topic some thought,
highlighting 10 strong candidates. Later on, I'm going to add
another eight of my own in a moment. And in part two of this
series, I'll cite the three most appealingstocks in the group on
a purely fundamentalbasis .
What's In The S&P 500?
Many might suspect that Standard & Poor's simply chooses
companies with the largest market values for inclusion in the
index. But size isn't everything. Standard & Poor's also
wants to focus on industry leaders, ensuring that a wide variety
of industries are well represented.
It's a crucial distinction. Simply focusing onmarket
capitalizations might make the index tooheavy on tech or banks.
Companies such as
U.S. Steel (
Advanced Micro Devices (
Allegheny Technologies (
, for example, are all worth less than $3 billion, which is
smaller than most companies in the S&P 400 mid-cap index.
Ifmarket value were a primary consideration, they would have been
kicked out long ago.
Still, you can't completely ignore a company's size. Here are
the largest companies in the S&P 400 mid-cap index by market
Here are the largest mid-cap companies, in the context ofsales
These companies may seem huge, but for the most part,
theirprofit margins are so small that they really aren't the
dynamic companies that Standard & Poor's prefers for the
500-stock index. What about the mid-caps with the strongest net
profits in 2012?
Notice that electronics distributors
Arrow Electronics (
appear in both tables. Indeed, this niche is quite
Ingram Micro (IM)
Tech Data (Nasdaq: TECD)
are similarly excluded. It is likely a matter of time before one
is added to the S&P 500.
Also, industrial bearings maker
Toll Brothers (TOL)
are right behind these 10 companies interms of 2012 profits, and
it's almost inevitable that theywill eventually find their way
into the S&P 500 due to their industry leadership.
Now, let's look at the 10 companies that Credit Suisse
believes are in consideration for inclusion in the S&P
It's hard to see why Credit Suisse thinks
Annaly Capital (NLY)
American Capital Agency (Nasdaq: AGNC)
merit inclusion in the S&P 500. Those companies are focused
onfinancial engineering -- they aren't the kind of long-term
wide-moat businesses that Standard & Poor's seeks
Yet on this list, there are four companies that look like
solid bets, thanks to their industry leadership and current size:
General Growth Properties (GGP)
Hertz Global Holdings (HTZ)
J.B. Hunt (Nasdaq: JBHT)
, which are leaders in the fields ofreal estate , vehicle and
equipment rentals, electronic instrumentation and freight
ADuopoly Poised For Profits
In the past half-decade, Hertz and rival
have bought out smaller rivals and are now global behemoths, with
a combined $19 billion annualrevenue base. Frankly, these were
stunningly greatstock picks after the 2008 financial crisis, as
investors mistakenly assumed that they would hit deep financial
Yet even as both of these stocks have rebounded sharply since
then, the wide moats around these businesses, coupled with an
eventual firming of the Europeaneconomy , means they have great
long-term prospects. (My colleague Dave Goodboy recently provided
a savvy summary of Hertz's prospects.)
Where Are The Truckers?
The S&P 500 has always had a considerable exposure to freight
transporters. Railroad operators such as
Kansas City Southern (KSU)
Norfolk Southern (NSC)
Union Pacific (UNP)
all make the grade. But where are the trucking firms? None are
the index, though J.B. Hunt, with more than $6 billion in
projected 2014 sales, is the big name in the industry -- and the
most likely candidate when Standard & Poor's corrects this
Tap Into The Cloud
And although the S&P 500 index has considerable exposure to
technology, there are few companies solely focused on cloud
computing. That's why Credit Suisse suspects that data center
may soon get the nod. Over the course of your day online, you
probably tap into one of Equinix's many global data centers as
you surf the Web. The company's $2 billion annual revenue base
may be a bit small, but this is the quintessentialbusiness model
for the 21st century.
Risks to Consider:
Possible inclusion in the S&P 500 should not be seen as
the sole basis for aninvestment in these firms, especially
considering that an invite may not come for another year or
Action to Take -->
In the next part of this series, I will be focusing on both
Credit Suisse's candidates, as well as some of my own. I'll
profile my top three picks that are both S&P 500 candidates
and sport compelling value.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.