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Google to be Added to S&P 500 Index
hrbrmstr writes "According to marketwatch.com, Google is being added to the S&P 500, replacing Burlington Resources Inc. While this has provided a short-term boost to the stock price, time will tell what the overall impact will be on this respected index and the institutions (i.e. mutual funds) that follow it."
The P/E and forward P/E of the S&P has been getting higher and higher every decade. This won't help. Sure they have to replace Burlington resources with something, but Google? Well, I guess they offset GM for the short term at least.
Right now Google is built on an advertising model. They are just one decline in online advertising away from having everything fall out from under them. If they are going to stay a serious contender, they need to take the corporate search market very, very seriously and make it a key component of their product offerings.
For all that can be said about them, Microsoft at least sells products as the foundation of their business. As long as people need a good (yes, XP is good for many users, this coming from a Mac fan) OS for their cheap PCs or an office suite, Microsoft has a strong position. Google, not so much. They may have the best search product, but they are dependent on online advertising, which can decline even if their engine reachs near sentient comprehension of what you really want to know.
This might seem to be good news on the surface but let's look into the ramification of this. First would you buy any stock with a P/E > 50? I believe it is foolish and very risky to do so. Now the problem is that I own almost all of my investments in S/P 500. Hmmm - I will be indirectly buying this stock I don't want because it is a component of the 500; thus, to mirror the index my Mutual funds will have to start picking up Google. Crap, now I beleive the 500 is a slighlty higher risk investment now with Google then before without it and it dons't seem to follow my investment goals.
According to this guy, this is a big problem with the S&P 500 index funds. When a company gets added, it's riding high. The company that gets bumped is low. So if you follow the S&P, you're selling low and buying high.