Goldman Sachs identifies the payment and financial transaction stocks that are likely to move in an index reshuffle and the changes in the growth prospects.
"Index providers S&P and MSCI propose in early 2022 to change industry classifications that will mainly affect the Technology and Financials sectors," equity strategist David Kostin writes. "One proposal involves the dissolution of the Data Processing & Outsourced Services sub-industry within Info Tech and re-assignment of the stocks to Financials (Transaction & Payment Processing Services) and Industrials."
"S&P 500 (SP500)(NYSEARCA:SPY) Financials weighting will rise to 13% (from 11%) while the Tech weighting will fall to 26% (from 29%)."
Goldman says Visa (NYSE:V), Mastercard (NYSE:MA), PayPal (NASDAQ:PYPL), Fiserv (NASDAQ:FISV), Global Payments (NYSE:GPN), Jack Henry (NASDAQ:JKHY) and Western Union (NYSE:WU) will go to Financials (NYSEARCA:XLF).
Automatic Data Processing (NASDAQ:ADP), Paychex (NASDAQ:PAYX), FLEETCOR (NYSE:FLT), Fidelity National (NYSE:FIS) and Broadridge Financial (NYSE:BR) are expected to move to Industrials.
Non-index stocks like Square (NYSE:SQ), soon to be renamed, and Toast (NYSE:TOST) are also expected to be reclassified, they say.
"On a pro-forma basis, the proposed Financials sector will have similar interest rate sensitivity as the current sector but the excess returns will be only slightly less cyclical," Kostin says. "Within Financials, the largest pro forma industry weightings will be: Banks (31%), Transaction & Payment Processing Services (18%), Insurance (14%), Multi-Sector Holdings (10%), Financial Exchanges & Data (8%), Investment Banking & Brokerage (8%), and Asset Management & Custody Banks (6%)."
"The reclassification of V, MA, and PYPL into Financials would also redefine the sector’s growth and valuation profiles," he adds. "The addition of these three companies along with four others that we view likely to move would increase the P/E multiple of the Financials sector by one turn (to 16x), but the sector would remain extremely inexpensive vs. history."
"If V, MA, and PYPL shift from Info Tech to Financials, they will become the fourth, fifth, and sixth largest companies in the sector, representing 16% of its market cap and 7% of earnings. These new sector constituents posted superior risk-adjusted returns during the three years 2017-19, and 2020, but have dramatically underperformed YTD. Looking forward, the prospective sales and EPS growth for these stocks compares favorably with the largest companies in the sector."