S&P 500 Index May Search Out Google
Google (GOOG: Nasdaq)
By Bear Stearns ($381.55; Feb. 6, 2006)
WE THINK THAT IT IS HIGHLY LIKELY that Google will be added to the Standard & Poor's 500 index as it is the only one of the top four Internet companies (eBay, Yahoo and Amazon.com being the others) that has yet to be included.
Inclusion to the index should be a positive catalyst for Google's stock, as funds should be prompted to buy into the stock in order to track the S&P 500 index and keep their weightings in-line with it, as it is widely considered the benchmark for many funds.
We believe that Google meets all eight criteria for inclusion. However, we think that Standard & Poor's is weighing the percentage of Google's sector that is currently represented in the S&P 500, as well as whether Google's share price is reasonable.
[To be included in the index, U.S.-based operating companies must show adequate liquidity and a reasonable share price, four consecutive quarters of positive earnings, float of at least 50% of shares outstanding, and be an IPO seasoned for at least six to 12 months.]
For Google, we estimate demand of approximately 20 million shares from index funds, which represents about 1.5 days of volume and roughly 7% of Google shares outstanding. Hence, if the stock were to be included in the index, about 7% of Google stock would be locked in index capital, which we believe could reduce the trading supply of the stock.
Historically, stocks added to the S&P 500 posted median gains of nearly 7% and average gains of about 8.5% during the 30-day window following the announcement up to actual inclusion, which we believe reflects both speculative buying as well as physical demand for the stock from index funds.
Separately, listings on Google Base rose 4% last week to 16 million with about 96% of the listings spread across four categories: products, vehicles, jobs and housing. We continue to believe that investors as well as management of "Walled Gardens" or paid listings sites should pay attention to the growth of those categories in Google Base as it could potentially disrupt their business models.
Amazon was the most recent Internet stock to be added to the index, replacing AT&T, which was acquired by SBC. The stock was added to the index on Nov. 21, 2005 (announcement made on Nov. 14). Amazon's stock rose 5% the day after the announcement was made.
We think that S&P 500 inclusion is likely providing a support level for Amazon's stock in the $37-to-$38 range, after what some believed were disappointing fourth-quarter earnings. Likewise, we believe that S&P 500 inclusion should provide support levels for Google's stock.
-- Robert S. Peck
online.barrons.com |
