This post was originally published on this site
Is Uber Technologies
UBER,
really worth $2.6 billion more as a company now that it’s being added to the S&P 500
SPX
? That’s the question Uber investors should be asking in the wake of S&P Dow Jones indices’ announcement last weekend that the ride-service company would become part of the S&P 500 index, effective Dec. 18. On Dec. 4, in the first trading session after the announcement, Uber rose 2.2%.
It’s difficult to justify this jump — which translates to a $2.6 billion increase in market cap — in terms of the company’s fundamentals. It’s not as though more consumers will now be taking rides in Ubers rather than in a taxi or Lyft
LYFT,
or any other ride-hailing company. It’s not as though Uber will now have more profitable new ventures in which to invest.
On the contrary, Uber’s future earnings prospects today are no different than they were last week, according to Lawrence Tint, the former U.S. CEO of Barclays Global Investors, the organization that created iShares (now part of Blackrock). Tint added in an interview that Uber can avoid being overvalued only if its shares lag the S&P 500 in the coming weeks.
Still, a number of exuberant Wall Street analysts responded to Uber’s S&P 500 inclusion by increasing their target prices for Uber stock. Their rationales vary, from the idea that the company will now repurchase more shares than it would have to the notion that, because the company is now in the S&P 500, it will try to grow at a faster pace. But these rationales don’t pass a simple test.
Why, for example, would inclusion in the S&P 500 make the company repurchase more of its shares? If Uber’s board of directors last week didn’t think that a share repurchase was a good idea, why would they reach a different conclusion now that the shares are trading higher? And why would being part of the S&P 500 enable the company to grow faster?
Though we don’t yet know how investors will answer these questions in the case of Uber, we do know that the price impact of being added to the S&P 500 has been declining. Over the last decade, according to a recent study, this impact has been statistically indistinguishable from zero.
The study, “The Disappearing Index Effect,” was conducted by Robin Greenwood, a professor of finance and banking at Harvard Business School, and Marco Sammon, an assistant finance professor at that institution. They found that the price impact of an S&P 500 addition was greatest many years ago when index funds were just beginning to grow in popularity and the market had not yet caught on that those funds would need to buy the added stock en masse. Investors subsequently became widely aware of this “index effect,” and as so often happens in the stock market, this awareness led to the killing of the goose that laid the golden egg.
The professors conclude: “The decline of the index effect is much like the evidence for other anomalies [patterns that can be profitably exploited], that they decline once they are well recognized by the market.”
Given this research, you probably aren’t particularly interested in trying to exploit the index effect the next time a stock is added to the S&P 500. If you want to try anyway, pay close attention to press releases issued by S&P Dow Jones Indices to discover when an addition is announced.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
More: After best stretch since 2020, how much higher can stocks climb? Here is what history shows us.
Also read: Goldman Sachs money manager digs into three themes for long-term growth
