Could You Profit From This Special Situation?

Back in mid-2001, Jason Zweig, now a finance columnist for The Wall Street Journal, penned an article that could provide the secret to unlocking some quick gains for speculative investors. Zweig focused on the fury of buying and selling that surrounds a company's inclusion in the S&P 500 index.

I'll get to the stocks that are set to pop and why in a minute, but first, here's what Zweig wrote more than 10 years ago:

By the end of the first day a stock is included in the S&P 500, roughly 8% of its shares disappear into the portfolios of index funds, where they remain indefinitely...Meanwhile, the shares that the committee deletes from the index drop that day like ducks shot out of the sky.

In short, getting in on a stock before it becomes part of the S&P 500 index can provide a big short-term boost!

The S&P 500's newest member
This past Wednesday, S&P announced the company that would become its newest member: TripAdvisor (Nasdaq: TRIPV  ) .

The company will be spun out of travel booking site Expedia (Nasdaq: EXPE  ) . Frustrated with its slow growth relative to other travel peers like priceline.com (Nasdaq: PCLN  ) and Travelzoo (Nasdaq: TZOO  ) -- which have both doubled in the past two years -- Expedia is jettisoning its fast-growing business in order to unlock the value that's going unrecognized.

In order to make room for TripAdvisor, S&P will be removing network gear specialist Tellabs (Nasdaq: TLAB  ) from the S&P 500. Tellabs has had a rough 2011, as it counts Clearwire (Nasdaq: CLWR  ) among one of its biggest customers. Clearwire itself has had an even worse year, despite recently having won an elaborate game of chicken with Sprint (NYSE: S  ) to get the mobile company to provide more capital toward building out its WiMAX network.

An easy decision, right?
Given this information, my suggestion should be crystal clear: TripAdvisor's a buy, Tellabs is a sell, right? Well, like so many things in the investing world, the devil is in the details.

While TripAdvisor's shares will likely get a very nice boost from institutional buyers and Tellabs will likely take a spill, the story doesn't end there. As Zweig went on to note in his 2001 article, what the S&P is really doing is buying high and selling low. Consider these statistics that were compiled for him by Philadelphia-based investment firm Aronson & Partners.

	Year Leading up to Index Change	Year Following Index Change	Total 2-Year Performance
Stock Being Added	65.75%	(47.66%)	(13.25%)
Stock Being Delisted	(11.97%)	16.71%	2.74%
Difference (Percentage Points)	(77.72)	64.37	15.99

 Source: Money magazine.

In essence, the average stock is just peaking and running out of steam once it gets added to the index, while the stock getting booted is just bottoming out and getting ready for a positive run. Even when the first year is taken into consideration, it's the stock getting booted that outperforms its vanquisher by an astounding 16%!

So what should you do?
Just because these patterns have been established, it doesn't mean that TripAdvisor and Tellabs will follow the same script. For starters, TripAdvisor is a spinoff, rather than some rocket stock that's just finishing off a year of astounding performance.

And while things will likely improve for Tellabs as its major customers get back to building out its infrastructure, the business is still a very competitive one.

The real point I want to highlight is this: While stock market gurus may have found ways to profit from the day-to-day gyrations in the market due to special situations, I believe that for the average Foolish investor, making decisions based on long-term fundamentals remains the smartest way to grow your savings.

Along those lines, I'd like to offer you access to our year-end special free report: "The Motley Fool's Top Stock for 2012." Inside, you'll find out about a solid company that's providing a valuable service to the growing economies in Central and South America. No super-secret special situations here, just solid investing advice. Get your copy today, absolutely free!