Lululemon Athletica’s
stock was surging Monday as investors rallied behind the news that it would soon join the
S&P 500.
Lululemon
(ticker: LULU) will start trading in the index on Wednesday, S&P Dow Jones Indices said late Friday. The stock replaces Activision Blizzard now that it has been acquired by
Microsoft
(MSFT). The $69 billion deal closed on Friday.
Shares of Lululemon, the exercise apparel company, were gaining 10% to $417.03 on Monday. The S&P 500 was up 1.1%.
The S&P 500 represents 500 of the largest publicly traded companies. While there are several criteria a company needs to meet to join the index—including profitability and trade volume—market capitalization tends to weigh the heaviest. According to Dow Jones Indices, companies must have an unadjusted market cap of at least $14.5 billion to be included. The median market cap as of Sept. 29 was about $30 billion. Ahead of Monday’s trading session, Lululemon’s market cap was $49.7 billion.
Because there are certain criteria that companies need to meet to join—and remain—in the S&P 500, it’s common for their stocks to cycle in and out. That has accelerated as newer companies—especially in the tech space—have grown at a fast clip. In the late 1970s, the companies in the S&P 500 had an average tenure of about 35 years, according to a McKinsey study. By 2019, the average tenure was closer to 20 years, the firm found, as younger companies outperformed more established players.
Stocks often get a bump when they join the S&P 500. Not only does the inclusion lend the company additional credibility, it also exposes the stock to more buyers. These are chiefly passive funds that track the S&P 500, which will now need to pick up shares of the new company.
Early studies found that index inclusion led to a permanent increase in a companies’ market value and stock price—something reflected in Monday’s share performance.
But recent data suggest otherwise. A 2011 study from the Federal Reserve Bank of New York argued that there was “no permanent effect” on market value after joining the index. A 2020 Ohio State University study found that after the initial jolt to the stock price, joining the S&P 500 has actually had a “negative impact on shareholder wealth.”
Still Lululemon has had a strong run this year. The shares are up 28%, outperforming the S&P’s 13.7% gain. Analysts believe the company can keep up its winning streak. Close to three-fourths of analysts have a Buy rating on the stock, 17% rate it a Hold, and 9% have a Sell rating, according to FactSet.
Write to Sabrina Escobar at [email protected]
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