[from Red Herring-finally some good balanced reporting, unlike the FUD from CNN Market Wrap]
Tech stocks enrich Standard and Poor's
By Dan Briody
Redherring.com, July 27, 2000
In a market that, for better or for worse, has gone tech-crazy sometimes, the Standard and Poor's 500 index has stood out as a disciplined and consistent overall market indicator. But even the levelheaded people who choose the stocks for this benchmark have had to concede the importance of the technology sector within the broader economy. As a result, they have been beefing up the index's high-tech holdings, albeit selectively.
This week JDS Uniphase (Nasdaq: JDSU) and Palm (Nasdaq: PALM) are being added to the S & P 500's ranks, booting out ailing retail pharmacy chain Rite-Aid (NYSE: RAD) and former Palm parent 3Com (Nasdaq: COMS).
JDS Uniphase and Palm are the fifteenth and sixteenth tech companies added to the index since the beginning of the year. More than half of the total additions to the S & P 500 this year have been tech companies, and six of the past eight new S & P 500 stocks have come from the tech world. And with another 15 or so changes likely throughout the remainder of the year due to pending mergers, several more tech companies are sure to land among the 500. Currently, 34 percent of the S & P 500 companies can be broadly classified as technology stocks.
Though officials at Standard and Poor's say the index has always tracked the overall market, it wasn't until recently that the index has taken on more of a tech flavor. Beginning with the inclusion of America Online (NYSE: AOL) on the first trading day of 1999, a steady stream of tech bellwethers have made their way into the index, including Qualcomm (Nasdaq: QCOM), Yahoo (Nasdaq: YHOO), and Siebel Systems (Nasdaq: SEBL).
The S & P 500 isn't the only market indicator waking up to the tech trends. Last year, the Dow Jones Industrial Average picked up two of the technology world's stalwarts in Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC). This move was widely viewed as strong validation for technology stocks, especially since this marked the first time that Nasdaq-listed companies were selected for the widely quoted average of 30 stocks.
LIKING THE FIBER-OPTIC VIEW
But Standard and Poor's has clearly been more daring with their selections. While many feel the addition of JDS Uniphase was long overdue, folks at the S & P 500 wrestled with the company's Canadian roots, unwilling to list its stock on both a Canadian index and an American index. Ultimately, the board of nine members that selects the index's stocks felt they were no longer able to overlook the fiber-optics behemoth and added them on. JDS Uniphase's recently announced merger with SDL (Nasdaq: SDLI) is still pending and a long way from being completed, but the S & P index's board felt that adding JDS Uniphase now would not affect the merger.
Consequently, JDS Uniphase has seen its stock jump 27 percent since the news was announced last week, as portfolio managers running S & P 500 index funds rushed to buy up shares in a big way. Because the S & P 500 is a weighted index, JDS Uniphase, with its hefty $105.7 billion market cap, will come in with a high ranking, forcing fund managers to add a substantial amount of shares to their holdings. Just in case it still needed it, the inclusion in the S & P 500 is lending JDS Uniphase, and the fiber optics market overall, the kind of credibility you just can't buy.
"They already had that anyway, but it is always nice to be part of the standard indices as well," says David Wong, analyst at PaineWebber. "JDS is a very important player in a very important area. It is an excellent long-term investment." Even though companies like Corning and Lucent were already in the index, the addition of JDS Uniphase is really the first pure-play fiber-optics company to be added to the index.
WHEN KIDS BEAT THEIR PARENTS
As for Palm making the leap into the index and leaving its one-time owner in the dust, S & P 500 representatives felt the move was a no-brainer. "Looking at the market cap and the way the pieces have been trading, there wasn't much question as to what was the more dominant piece and the more valuable piece," says David Blitzer, chairman of the S & P indices. "We want to pick leading companies in leading industries. 3Com, after the transaction, I'm not sure is a leading company. Handheld computing looks like it will be a leading industry, and Palm is a leading company in that market, without a doubt."
Palm is the ninth computer hardware maker to join the 500, at a time when making money from hardware is getting increasingly difficult to do. But Palm is profitable, and making money, according to Mr. Blitzer, is a key criteria in selecting the S & P 500.
Lest anyone think that the S & P 500 is being influenced by investors' insatiable appetite for tech stocks, the index has so far resisted including large-cap companies like Amazon.com and Ariba for one reason: They don't make any money. While investors only recently have begun to take such fundamental concerns into account, the S & P 500 has stuck to its guns amidst all the Internet hype. Mr. Blitzer insists that the conspicuous absence of online retail and business-to-business (B2B) stocks contrasted with the proliferation of communications, semiconductor, and networking stocks has nothing to do with sector bias -- just the bottom line.
"One of the guidelines that we have is that the company should be financially viable, and that means that they make money, or at least somebody thinks they might," says Mr. Blitzer. "Amazon doesn't make any money, and I haven't found anyone that is sure they will. We are pretty stubborn about it, and we used to get all kinds of complaints. But it is in nobody's interest to have to take companies in and out too often."
And for every investor that complains about the S & P 500 moving too slowly to incorporate tech stocks, there seems to be another concern that the index is becoming too tech-heavy. Leah Modigliani, a portfolio strategist at Morgan Stanley Dean Witter, hears more people lamenting the addition of too many tech stocks.
"I think there is more tech in the index, and it's been a big increase, but I think it is simply a reflection of the changes in the market and the economy," says Ms. Modigliani.
How long technology continues to remain the dominant sector of the S & P 500, à la the energy sector in the late 1970s, remains to be seen. But if the board at Standard and Poor's didn't think tech stocks had legs for at least the foreseeable future, companies like JDS Uniphase and Palm would still be shut out of the index.
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