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On November 15 S&P Indices issued a press release detailing some changes to the S&P 600 index. While three of the five changes were due to acquisitions, two stocks, Mannatech Inc. (MTEX) and Nautilus Inc. (NLS), were scheduled to be replaced at the close yesterday because "They are no longer representative of the small cap market space". The companies that were added are Provident Financial Services Inc. (PFS), Contango Oil & Gas Co. (MCF), and (to replace an acquired company) Power Integrations Inc. (POWI).

As you can see in the following chart, the two stocks scheduled to be removed have dropped in value, while the stocks that will be added have risen since the announcement.



So what are the implications for these stocks?

There are several research papers that show that stocks being removed from the S&P 600 tend to gain back some or all of price declines occurring between the announcement and the effective date. Vice versa, the stocks added to the S&P 600 tend to lose any price gains occurring between the announcement and the effective date.

This anomaly is likely because the underlying fundamentals of a company do not change as a result of being added to or dropped from the S&P 600. When money following the S&P 600 is required to sell or buy, than they create a temporary price deviation that can be taken advantage of.

Since both Mannatech and Nautilus have dropped over 10% since the announcement, we can probably expect them to rise about 10% over the next 2 weeks to 2 months. It is also likely that Provident Financial Services, Contango Oil & Gas, and Power Integrations will underperfom the market.



Disclosure: Long MTEX and NLS

Source: Mannatech, Nautilus Removed From S&P 600: Will They Outpeform?