Yesterday, S&P shared its thinking on what exactly constitutes a "small cap" (as well as a "mid cap" and a "large cap"), breaking it out as follows:
- Large cap (S&P 500): >$4 billion (formerly >$3 billion)
- Mid cap (S&P 400): $1 billion to $4.4 billion (formerly $850mm-$3.8bln)
- Small cap (S&P 600): <$1.4 billion (foremerly $250mm-$1.2bln)
This is an interesting guideline that they have shared and gives us some guidance regarding future changes. Unlike the Russell indices, which are rebalanced annually, S&P engages in a continuous process that results in incremental changes all the time.
The S&P 500 currently has 41 names (8%) that are below the minimum. The S&P 400 currently has 62 names (15%) that are in excess of the $4.4 billion top-end. One has to wonder if the indices will be experiencing more turnover than usual or if they will address this gradually.
Here are the 10 largest names in the S&P 400:
- Edwards LifeSciences (NYSE:EW)
- Joy Global (JOYG) - promoted today
- Cimarex Energy (NYSE:XEC)
- Borg Warner (NYSE:BWA)
- Chipotle Mexican (NYSE:CMG)
- NY Community Bancorp (NYB)
- Vertex Pharma (NASDAQ:VRTX)
- Lubrizol (LZ)
- Bucyrus (NASDAQ:BUCY) - going away due to merger
- Atmel (NASDAQ:ATML)
We can do the same exercise for the S&P 600 and see that there are 14 names in the S&P 400 less than $1 billion. 102 (16%) of the names in the S&P 600 are greater than $1.4 billion.
Here are the largest 10 names in the S&P 600:
- Cypress Semi (NASDAQ:CY) - promoted today
- Oil States International (NYSE:OIS)
- Varian Semiconductor (NASDAQ:VSEA)
- Regeneron Pharma (NASDAQ:REGN)
- Holly (HOC)
- Cooper Companies (NYSE:COO)
- Carbo Ceramics (NYSE:CRR)
- World Fuel Services (NYSE:INT)
- Amerigroup (AGP)
- Stifel Financial (NYSE:SF)
There has been significant research over the years regarding additions and deletions to the S&P indices. Clearly, the best outcome for a stock is to be added to an index when it wasn't a component of any of the indices beforehand, but it can be a good trading opportunity to get "promoted", especially to the S&P 500.
With the new guidelines, it will be interesting to see if S&P moves quickly to get the indices in line. If so, there could be some trading opportunities, especially in the mid cap names. While I didn't share the names, it might make sense to avoid the smaller names in the S&P 500 and particularly in the S&P 600, where 33 names (5.5%) are smaller than $200mm and could be at risk of deletion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.