And They're Off! JDS Uniphase Looks to Soar After S&P 500 Opens Its Doors
By Justin Lahart
Associate Editor
7/19/00 7:32 PM ET
Let the games begin.
Standard & Poor's announced tonight that it will add fiber-optic component maker JDS Uniphase (JDSU:Nasdaq - news) to the S&P 500 after the close on July 26. JDS will replace Rite Aid (RAD:NYSE - news), the embattled drugstore chain.
JDS was popping 13.25, or 12%, to 120 on Island ECN in after-hours trading tonight following the announcement.
There is over $800 billion indexed to the S&P 500, according to Merrill Lynch. Because JDS has a very high market capitalization (it stood at around $87 billion at Wednesday's close), it will enter the capitalization-weighted index with a very high ranking. That means that index fund managers are going to have to buy a tremendous amount of JDS next Wednesday.
"Total dollar flows, it's going to be around $6.3 billion" worth of JDS that indexers will need to buy, says Merrill equity derivatives strategist Diane Garnick. "That's roughly equivalent to 57 million shares, which is roughly equivalent to 3.14 days of volume."
Garnick's numbers are based on JDS Uniphase's share price at the close on Wednesday. If it closes higher the day it gets added, as big index additions almost invariably do, indexers are going to have to buy even more JDS.
The JDS addition comes with a few other wrinkles. For one, the company is scheduled to report fourth-quarter earnings after the close on July 26. Nice timing by S&P.
Second, the company announced last week that it will buy rival component maker SDL (SDLI:Nasdaq - news). The deal won't close for a while -- regulator approval is still pending -- and until it does SDL will continue to trade separately, albeit in line with JDS. This means that SDL should also receive any bump that JDS gets from the index addition. Arbitragers, who are playing the spread between SDL's proposed takeout price and its present price (which is slightly lower, reflecting the chance that the deal doesn't go through), are going to have their work cut out for them over the next week.
JDS has been long rumored to be on S&P's dance card, but until now was skipped over by the index selection committee, which picks additions to the S&P 500 based not just on market capitalization, but on financial and operating conditions. As a result, several companies with big caps, but scant earnings, have been slow to get added.
Once the addition of a large-cap stock to the index does get announced, however, it tends to have a profound effect. Between its addition announcement and its addition June 30, Broadcom (BRCM:Nasdaq - news) added 48.4%. Even more impressive, Yahoo! (YHOO:Nasdaq - news) traveled 63.6% between announcement and addition last December.
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