Uber investors are questioning whether the recent addition of the ride-service company to the S&P 500 index justifies its market cap increase of $2.6 billion. The announcement by S&P Dow Jones Indices has led to a 2.2% rise in Uber’s stock, but it’s challenging to understand this jump based on the company’s fundamentals alone.
The inclusion in the S&P 500 does not imply that more consumers will choose Uber over taxis or other ride-hailing services like Lyft. Neither does it suggest that Uber will have new and profitable ventures to invest in. According to Lawrence Tint, the former U.S. CEO of Barclays Global Investors, who created iShares, Uber’s future earnings prospects remain unchanged from the previous week. Tint believes that Uber will only avoid being overvalued if its shares underperform the S&P 500 in the coming weeks.
Despite this, several optimistic Wall Street analysts have raised their target prices for Uber’s stock following its inclusion in the S&P 500. Their reasons vary, from the belief that Uber will now repurchase more shares to the notion that being part of the S&P 500 will push the company to grow faster. However, these rationales are not convincing.
Why would Uber suddenly decide to repurchase more shares after being added to the S&P 500 if they didn’t consider it a good idea last week? Moreover, how does being part of the S&P 500 enable faster growth for the company?
As Uber enters this new phase, it’s important for investors to critically assess whether its increased value is truly justified.
The Changing Impact of Being Added to the S&P 500
Investors have been questioning how being added to the S&P 500 will affect the price of companies like Uber. However, a recent study suggests that the impact of such additions has been declining over the past decade. In fact, the study showcases that the price impact has become statistically insignificant.
Conducted by Robin Greenwood, a professor of finance and banking at Harvard Business School, and Marco Sammon, an assistant finance professor at the same institution, the study is titled “The Disappearing Index Effect.” It reveals that the greatest price impact occurred several years ago when index funds were still growing in popularity. Back then, the market had not fully realized that these funds would need to purchase the added stocks in large quantities. As investors gained awareness of this “index effect,” its significance dwindled, diminishing the golden opportunity it once presented.
Professor Greenwood and Professor Sammon conclude that like many other profitable patterns, anomalies decline once the market recognizes their existence.
Considering this research, it is unlikely that one would be interested in exploiting the index effect when a stock is added to the S&P 500. However, if you still wish to try, it is advisable to closely monitor press releases from S&P Dow Jones Indices to stay informed about any additions.
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