{"id":1616,"date":"2018-06-06T07:12:15","date_gmt":"2018-06-06T14:12:15","guid":{"rendered":"https:\/\/tradersnation.com\/?p=1616"},"modified":"2018-06-06T07:16:52","modified_gmt":"2018-06-06T14:16:52","slug":"opinion-why-adding-twitter-to-the-sp-500-could-be-a-sell-signal-for-the-stock","status":"publish","type":"post","link":"https:\/\/tradersnation.com\/index.php\/2018\/06\/06\/opinion-why-adding-twitter-to-the-sp-500-could-be-a-sell-signal-for-the-stock\/","title":{"rendered":"Opinion: Why adding Twitter to the S&P 500 could be a \u2018sell\u2019 signal for the stock"},"content":{"rendered":"

By MarkHulbert – <\/b>Columnist<\/p>\n

Twitter\u2019s stock jumped on news that the company is being added to the S&P 500.<\/p>\n

This may be a good time to sell Twitter TWTR, +0.15%<\/span><\/a><\/span><\/p>\n

That\u2019s because stocks added to major U.S. stock market benchmarks such as the S&P 500 SPX, +0.10%<\/span><\/a><\/span> \u00a0tend to lag the market over the next several years. In fact, the new stock in a benchmark frequently underperforms the stock it replaced.<\/p>\n

Twitter\u2019s addition to the S&P 500 <\/a>is a perfect opportunity for investors to learn about the risks inherent in popular companies that are riding high and the attractive long-term potential of stocks that are out of favor.<\/p>\n

Take the changes made in September 2013 to the Dow Jones Industrial Average DJIA, +0.35%<\/span><\/a><\/span> \u00a0. That\u2019s when three stocks were removed (Alcoa AA, -0.38%<\/span><\/a><\/span> \u00a0, Bank of America BAC, +1.32%<\/span><\/a><\/span> \u00a0, and HP HPQ, -0.56%<\/span><\/a><\/span> \u00a0 in favor of Goldman Sachs GS, +0.84%<\/span><\/a><\/span> \u00a0, Nike NKE, +0.74%<\/span><\/a><\/span> \u00a0 and V, +0.38%<\/span><\/a><\/span><\/p>\n

Since then, according to FactSet, the three deleted stocks have produced an average annualized total return of 21.5%, versus a gain of 17.1% for the three stocks that replaced them.<\/p>\n

(Note that we\u2019ll never know if Twitter will end up lagging the stock it replaced \u2014 Monsanto MON, +0.00%<\/span><\/a><\/span> \u00a0. That\u2019s because Monsanto is being acquired by Bayer AG<\/a> BAYN, -1.49%<\/span><\/a><\/span> \u00a0and will cease to trade as a separate company. So those keeping score will have to judge Twitter relative to the S&P 500 as a whole.)<\/p>\n

\n
\n
\n
\n
\n
\n
\n
\n
How the rules of portfolio construction are changing in today’s market<\/span><\/div>\n

<\/p>\n<\/div>\n<\/div>\n<\/div>\n

<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n

To be sure, not all of the S&P 500\u2019s deleted stocks outperform their replacements. But more often than not they do, according to research conducted by Wharton University finance professor Jeremy Siegel<\/a>. After measuring the impact of all additions and deletions to the S&P 500 index since its creation in the 1950s, he found that the deletions, on average, outperformed the additions.<\/p>\n

Another study, by Jie Cai of Drexel University and Todd Houge of the University of Iowa<\/a>, found a similar result for the Russell 2000 RUT, +0.23%<\/span><\/a><\/span> They found that, between 1979 and 2004, a portfolio of stocks deleted from the index outperformed a second portfolio of the added stocks by nine percentage points annualized.<\/p>\n

The Dow would be more than twice its current level \u2014 around 50,000 \u2014 had IBM not been removed from the index in 1939.<\/em><\/p>\n