The S&P 500 index committee said "No" to Tesla, Inc. (TSLA) and other high-flying momentum stocks in Friday's post-market release, adding three lesser-known blue chips to the iconic benchmark, effective Sept. 21. Etsy, Inc. (ETSY), Catalent, Inc. (CTLT), and Teradyne, Inc. (TER) got the nod instead, triggering mixed action on Tuesday even though tracker funds will need to buy proportional shares of these issues to balance portfolios.
- An S&P 500 committee added Etsy, Teradyne, and Catalent to the index, effective on Sept. 21.
- The committee failed to add Tesla, despite popular opinion.
- Technically speaking, the new components show little potential upside, at least in the short term.
The choices were odd if the committee was looking for companies ready to gain in share value because the new components are all pulling back from extremely overbought technical readings, raising the odds for lower prices in coming weeks. There were also better choices in the retail, semiconductor, and pharmaceutical categories, forcing market watchers to wonder why the S&P 500 chose to look backwards rather than to the future.
A tracker fund is an index fund that tracks a broad market index or a segment thereof. Tracker funds are also known as index funds, designed to offer investors exposure to an entire index at a low cost. These funds seek to replicate the holdings and performance of a designated index, constructed as exchange-traded funds (ETFs) or alternative investments to meet the fund's tracking objective.
Launched in 2005, Etsy matches buyers with sellers for handmade, crafted, and vintage goods through an e-commerce portal that features more than 60 million items. The company has grown rapidly by applying the eBay Inc. (EBAY) business model and now boasts a market cap of $13.87 billion. Wall Street loves the company, maintaining a "Strong Buy" rating on Etsy shares based upon 15 "Buy," 0 "Hold," and just 1 "Sell" recommendation.
The stock topped out at $35.74 in the first session of the April 2015 initial public offering and posted an all-time low at $6.04 in January 2016. A slow-motion recovery reached the prior high in April 2018, yielding an immediate breakout that stalled in the $70s in March 2019. It cleared that level in May 2020 and added nearly 70 points into August's all-time high at $141.41. The stock has lost more than 30 points since that time and is trading under the 50-day exponential moving average (EMA) for the first time since April.
Catalent was created in 2007 when The Blackstone Group Inc. (BX) bought Cardinal Health, Inc.'s (CAH) pharmaceutical technologies and services division. The company, which pays no dividend, came public in the low $20s in 2014 and has quadrupled in price in the past six years. It has been growing primarily through acquisitions over this period and is currently valued at more than $14 billion.
The stock posted an all-time low in the upper teens in 2016 and entered an uptrend that hit new highs after the presidential election. It stalled in the $40s in 2018 and cleared that resistance level in the second half of 2019, lifting to an all-time high at $95.70 last week. However, the stock then failed a breakout above $90 and has sold off to a seven-week low on Tuesday morning, with the announcement failing to stir immediate buying interest.
Teradyne is an "old school" chip manufacturer that has been trading on the U.S. markets since 1970. The stock has had its fair share of ups and downs over the decades, dumping to an all-time low at 94 cents in 1990 and zooming to an all-time high at $115.44 at the height of the internet bubble in 2000. The stock took a return trip into the single digits in 2009, while the uptrend since that time still hasn't reached 20-year resistance.
This traditional cyclical play is the committee's most "head scratching" choice because the stock reversed in July 2020 at the .786 Fibonacci retracement level of the 2000 into 2009 downtrend. This is a common turning point in recovery rallies, often printing the highest high in a buying cycle. As a result, Teradyne shares could trade much lower in coming years and undermine index upside.
The Bottom Line
The S&P 500 added three lesser-known stocks to the index, ignoring 2020's top momentum plays.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.