Posted at 10:05 p.m. PDT Thursday, July 20, 2000
JDS feels the S&P 500 `hiccup'
It gets boost from addition to index, but will the bump last?
BY MATT MARSHALL
Mercury News
Shares of JDS Uniphase Corp. of San Jose took the first step of the ``S&P hiccup'' by soaring 20 percent Thursday -- after Standard & Poor's announced it would add JDS to its widely watched index of 500 companies.
Don't hold your breath: If JDS stock follows other recent examples, it should fall about 6 percent over the next five trading days. ``When you get added to a big index, you get a big pop,'' said Daniel Barnes, analyst at Murphy New World Mutual Funds in Half Moon Bay. ``But you're more subject to systematic risk by definition. You're more at risk to be sold when the market turns down.''
The reason is that mutual funds buy the stock to include it in their portfolio of shares of companies that make up the S&P 500 index, which is widely considered to be a good indicator of the market's overall direction. Many investors seek to invest in such a portfolio because it is considered safer than investing in a handful of companies.
Thus, when a new firm is added to the index, mutual funds need to buy shares of the company up to the amount that it is represented in the index. In JDS Uniphase's case, at its current value, the fiber-optic equipment maker will make up just over 0.8 percent of the index.
That means funds that invest in the S&P index companies will need to buy about $6.3 billion, or about 57 million shares, of JDS Uniphase stock, according to Diane Garnick, an equity derivatives strategist at Merrill Lynch & Co.
JDS shares rose to $128.13 from $106.75, adding about $13 billion to the company's market value. If the company were added to the index Thursday, its $199 billion market value would rank it No. 28 in the index, bigger than Time Warner Inc., Texas Instruments Inc. and Procter & Gamble Co.
David Toung, analyst at Argus Research in New York, notes how the shares of Broadcom Corp., which provides broadband digital data transmission, also skyrocketed 48 percent after the announcement on June 19 that it would be included on S&P, but has fallen 10 percent since Monday.
``There's a lot of short-term buying by momentum players,'' Toung said.
A similar trend has been seen in the other major Silicon Valley companies added to the S&P index. Consider the last four local companies added to the S&P that have a market capitalization of at least $30 billion: Yahoo Inc., of Santa Clara, Veritas Software Corp., of Mountain View, Siebel Systems Inc., of San Mateo, and Agilent Technologies, of Palo Alto. Their shares rose an average of 21 percent between the day of the announcement and their actual addition to the index, but fell an average of 6.2 percent over the next five trading days.
However, there are exceptions to the trend. Veritas, for example, fell between the announcement date and the actual addition to the S&P, and continued to fall afterward. And Broadcom's stock continued to soar two weeks after its addition to the S&P before falling this week.
Because JDS Uniphase is much larger than these other companies, its gyrations could be even wilder, since funds will be forced to buy up even more JDS Uniphase shares than usual.
JDS will be added to the index after the closing of trading Wednesday, the same day the company reports earnings.
However, some analysts, like Arun Veerappan, of Robertson Stephens, point out that JDS Uniphase shares took a big hit when the company announced a merger last week with San Jose neighbor, SDL Inc. Thursday's price increase, he notes, brings JDS Uniphase shares back to the level they were before the merger.
Indeed, SDL's shares also soared Thursday, increasing 19 percent to $428.06. Together, JDS Uniphase and SDL were the leaders of Thursday's 128-point rally on the tech-heavy Nasdaq composite index. The index rose 3.18 percent, to 4,184.56.
The news will not affect JDS-SDL merger plans, since the deal was based on a value of SDL's shares on the day of the announcement, of $441.51. Under the accord, each share of SDL will be exchanged for 3.8 shares of JDS Uniphase. Since both stocks rose in tandem Thursday, the terms of the deal did not change significantly for either side.
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Contact Matt Marshall at mmarshall@sjmercury.com or (408)920-5920. |
