Will These Stocks Rally After Being Dropped From S&P 500?

Includes: KODK, NYT, ODP, SPY
by: Jersey Trader

Recently, Standard and Poor's announced some changes to be made to the S&P 500, 400, and 600 to make the indices more representative of their market cap ranges.

S&P MidCap 400 constituents F5 Networks Inc. (NASD:FFIV), Netflix Inc. (NASD:NFLX) and Newfield Exploration Co. (NYSE:NFX) will replace The New York Times Co. (NYSE:NYT), Office Depot Inc. (NYSE:ODP) and Eastman Kodak Co. (NYSE:EK) in the S&P 500, and, likewise, The New York Times, Office Depot and Eastman Kodak will replace F5 Networks, Netflix and Newfield Exploration in the S&P MidCap 400 index.

S&P SmallCap 600 constituents SM Energy Co. (NYSE:SM), Concur Technologies Inc. (NASD:CNQR) and East West Bancorp Inc. (NASD:EWBC) will replace Corinthian Colleges Inc. (NASD:COCO), Wilmington Trust Corp. (NYSE:WL) and Coldwater Creek Inc. (NASD:CWTR) in the S&P MidCap 400, and likewise, Corinthian Colleges, Wilmington Trust and Coldwater Creek will replace SM Energy, Concur Technologies and East West Bancorp in the S&P SmallCap 600 index.

Given that stocks dropped from the S&P 500 tend to outperform in the next week or two after the effective date, we can probably expect NYT, ODP, and EK to be a good short term buy beginning December 17. This effect is likely because the underlying fundamentals of a company do not change as a result of being dropped from the S&P 500. When money following the S&P 500 is required to sell, it can create a temporary price deviation that is later reversed.

Looking at other indicators, The New York Times and Eastman Kodak appear to be better medium term investments than Office Depot. That could also mean that Office Depot will get a bigger bounce in the week after December 17 since lower quality stocks often have sharper rallies.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.