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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."
People have been saying this and I will say it again: these are signs of a new internet bubble. People (tend to?) forget. Lessons are learned the hard way.
Although Google's image and bank deposit have become big, be aware their revenues are almost 100% dependent of advertisement revenues. This is a market which can turn upside down in a second.
Standard & Poors 500 - a group of stocks that are chosen to represent the movement of the overall market. It's a better indicator than the Dow Jones index, which is only about 30 stocks.
As for Google joining the S&P, it doesn't mean anything other than a momentary blip on the stock price. It's an inflated stock which doesn't pay a dividend and is traded far over it's revenue. Personally, I wouldn't touch the stock, especially because not only is it overvalued, but the company could very easily be displaced by another company who comes along and does a better job. It's not like a group of college kids can get together and form a competitor to Exxon or Coca Cola, but they sure could threaten Google. It's just that the average, non-technical person wants to get on the next Big Thing Train and they've heard of Google, they probably use the search engine, so they buy the stock.
Like Google has mission of providing good search results, S&P is about providing reliable index value. Google is representative of the IT sector and there's not much about it being 'good', 'strong', 'reliable' or anything like this. Google will be the first to go down the drain if the bubble bursts and S&P know it well - and pretty much that's why they added Google. Because it will pretty well show when the bubble bursts, resulting in accurate indication of the state of the market by S&P. Google may not like Microsoft but when people type 'MS Windows' in Google, they expect to be sent to the proper Microsoft webpage, and that's why Google keeps Microsoft scored high for these keywords in their results. Brokers watching S&P expect to see it go down when the stock is about to down really deep, so a group of companies that will go down first are likely to be listed. Google rides the tide of the net, new technologies, new developments, the leading edge - so they pretty well predict which way the market is going, stagnant, losing, gaining - they are useful as the indicator. So rejoicing or grieving about them being added to S&P doesn't matter and won't help or disturb Google all that much. It will help S&P.
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A couple of years ago, a stock whose business consisted of owning short term treasuries (silly but somewhat relavent) would have been priced at a 37% discount to their asset's market value at a 50 P/E. I think you'd agree that buying a treasury for 63 cents on the dollar represents a pretty good investment. Also, cyclical companies can see earnings swings of 300-400% from year to year, which can lead to cheap stocks with trailing P/E's that range all the way to infinity (no earnings last year--substantial earnings this year). While your rule is a pretty good one, there can be exceptions. It's generally unwise for value investors to follow any hard and fast multiple rules (aside from buy at a large discount to intrinsic value).
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While what you are saying is true on a basic level, the net impact on your funds is close to zero. The total risk/reward for any one stock, of the 500, when equally weighted, is insignificant. In fact, it may actually reduce risk by diversifying the S&P more. There are plenty of 'risky' stocks in the S&P 500, but it gains it's stability from having such a breadth of stocks that the maximum impact of one volatile stock is muted. If equally weighted, each company represents 0.2% of the portfolio. In other words, even if Google went bankrupt (anyone want to place bets on the odds of that happening?), the total impact on your portfolio would be a 0.2% drop. Now, if Google DID go bankrupt, the impact on the S&P would be much more severe, but that's more due to the related companies and the negative impact a major bankruptcy like that would have on the economy as a whole, and investor attitudes in particular. I for one welcome it - it's about time, their market capitalization, revenues, and balance sheet have placed them in the top 500 companies in the US pretty much since they went public.
If you're concerned that much about having Google in your S&P 500 mix, you can hedge against it by shorting Google (or using a proxy like long term put options) to the extent that they are represented in your S&P 500 holdings. If Google goes up, your S&P 500 holding goes up, but the hedge goes down, and vice versa in case Google tanks. For small accounts (under $25K) this might be clumsily achieved due to the impact of transaction costs, but for decent size accounts this is a readily available risk management method.
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Even if you specifically want a fund that invests in larger US companies, there's non-S&P 500 based large-cap index funds. And if you can't easily move your money from S&P 500 funds, there's also "extended market" funds that buy everything *except* the S&P 500. These funds will now have to *sell* their Google stock, and put the proceeds into other stock.
Are you adequate?