Uber Technologies is finally going into the S & P 500, four years after going public and just shy of an all-time high. It has become a well-observed phenomenon: companies are often added to the S & P 500 when they are at their highest values. That’s good news for Uber investors, because all those index investors are going to be forced to buy Uber to include it in the index. And there are a lot of them: roughly $12 trillion is directly or indirectly indexed to the S & P 500. Uber’s entry is bad news for holders of the index, however, because in the four years it has been publicly traded it has become a very expensive company to buy. First is the price: Uber went public in May 2019 at $45, and is now close to $60. Even a month ago, it was just $40, but the market rally, and speculation Standard & Poors would soon add it to the S & P 500, has driven the price up considerably. Then there are the number of Uber shares outstanding: the company has added a lot, from roughly 1.6 billion shares in 2019 to nearly 2.1 billion shares today, an increase of more than 25%. UBER YTD mountain Uber is up 137% in 2023. Add it all up, and you have a very expensive stock to add to your index: the market capitalization is $122 billion, which would make Uber roughly the 66th largest company in the S & P 500, on a par with American Express ($128b), Lowe’s ($120b) and AT & T ($119 b). Why do it now? Much of it has to do with the S & P 500 rules for inclusion, one of which requires: 1) positive earnings for the most recent quarter and 2) positive total earnings for the sum of its trailing four consecutive quarters. Uber fits this criteria: it was profitable last quarter and the sum of its last four trailing quarters has also been profitable, for the first time. Will the “S & P 500 curse” strike again? Then there’s the problem of what is called the “S & P 500 inclusion effect:” the tendency of a company’s stock price to rise from the period when the inclusion is announced (or even before) up until the date it is added. There is a corollary to this, informally called the “S & P 500 curse,” the tendency for a stock to then underperform shortly after it goes into the index. This tendency has gained increased attention since passive indexing built a substantial foothold, starting before the global financial crisis of 2008. The best recent example is Tesla . It was profitable at the end of the second quarter of 2020 and the sum of its last four trailing quarters had also been profitable. S & P announced it would add Tesla to the S & P 500 on November 16, 2020. Between that moment and when it was added on December 18th, the stock shot up over 50% and continued to rally into early January. It instantly became the fifth largest stock in the S & P 500. Then Tesla flattened out and went nowhere for the next year. This effect has also been observed in reverse. In July 2014, U.S. Steel was removed from the S & P 500, and the share price subsequently rose in the following months, though it dropped in the months after that. A 2006 study concluded that stocks added to the S & P did show “positive abnormal returns” from the period of the announcement to the date of inclusion, citing “investor awareness” as the primary factor. Another study by McKinsey found that being included in the S & P 500 did indeed juice a stock price, but the effect on average only lasted for about 45 days. Standard & Poors itself acknowledged this “inclusion effect,” but in a 2021 paper suggested that the impact was in “structural decline” due partly to improvements in stock liquidity in recent years. Resign yourself to overvaluation The bottom line: the act of adding a company to the S & P 500 (or speculating that it will be added) has the effect of at least temporarily overvaluing a company. Indexers are “buying high.” This leads to a strong likelihood it will underperform at some future date. The good news is that the turnover of the S & P 500 is relatively low: it’s typically less than two dozen stocks a year. And most of them don’t have the market capitalization clout of Tesla, or even Uber. Uber is set to join the S & P 500 on December 18th. The all-time closing high was $60.63 on February 12, 2021. It closed yesterday at $58.63. For indexers, the only issue is whether it’s “buy high” or “buy even higher.”
