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Plenty of studies show that the stocks removed from the NASDAQ-100 index typically present great buying opportunities. Normally the stocks have been beaten down for the last couple of years, making them candidates for removal. On top of that, the removal process causes forced selling in underlying products that attempt to benchmark the index, creating a market-event-generated bottom.
In December, the index makes an annual adjustment, which this year includes the removal of five stocks, effective as of Dec. 23. The stocks include Fossil (NASDAQ: FOSL ) , Microchip Technology (NASDAQ: MCHP ) , and DENTSPLY International (NASDAQ: XRAY ) . One has to wonder whether the usual buying opportunity will materialize.
Fossil, Microchip, and DENTSPLY rewarded shareholders well this year. They don't look like your typical beaten-down stock. However, the index is comprised of the 100 largest nonfinancial stocks, and other qualified stocks experienced even bigger gains.
Have a look at the one-year performance of these three ousted stocks compared to that of the Nasdaq-100:
Fossil makes for an interesting removal from the index. The stock has made a huge rebound from its massive collapse back in 2012. The global designer and marketer of clothing and fashion accessories continues to rebound with a solid increase in earnings. With analysts expecting long-term earnings to grow by 15% annually, the stock makes an odd choice to remove from the index. In addition, revenue continues to grow 10% each year. The stock only trades at 17 times forward earnings, again placing it within a normal valuation based on expected growth.
Fossil is also executing a $1 billion share repurchase plan. The company repurchased 2 million shares at an average stock price of $112 during the third quarter of fiscal 2013. In total, the company spent $228 million during the last quarter and nearly $400 million to date. The share repurchase is meaningful enough to have added $0.11 to quarterly earnings. In essence, the index is forcing funds to sell the shares to Fossil, which finds the price attractive.
Microchip Technology expects revenue to surge nearly 19% in the fiscal year ending in March. The provider of microcontroller, mixed-signal, analog, and Flash-IP solutions is also generating strong earnings growth, with analysts expecting long-term growth of 12%. The firm valued at $8.3 billion only trades at roughly 15.5 times forward earnings and provides interesting value for a stock being kicked out of an index.
Microchip has an interesting mix of businesses, including microcontrollers for storage products, Wi-Fi-based technologies, and capacitive-touch control solutions that allow for the designing of touch pads, touch screens, and 3D gesturing. The company basically supplies the semiconductor industry with a whole host of supplies that will benefit from the 4G rollout in the US and the upcoming one in China.
Emerging dental-supplies provider
While DENTSPLY expects limited revenue growth over the next few years, the manufacturer of dental supplies does expect to grow earnings. The stock has had a decent run of about 20% over the last year. Again, this situation is not typical of the stocks being removed from the index; it doesn't provide the normal downside pressure that typically makes the stock an attractive purchase.
While dental products are a stable industry in the U.S., emerging markets mostly lack adequate access to dentists. DENTSPLY obtains nearly 90% of revenue from developed markets such as the U.S., Europe, Japan, and Canada. Regions such as Latin America, the Middle East, Africa, and ex-Japan Asia only total around 10% of total revenue. This emerging-market opportunity won't provide immediate upside, but it should help provide the runway for decades of growth.
These stocks being removed from the NASDAQ-100 index probably don't provide the normal upside of a typical recent index removal, but these are all solid stocks apparently not respected by the market. Fossil, Microchip, and DENTSPLY should provide solid returns compared to the market, though maybe not the usual squeeze one expects of a beaten-down stock that is ejected from an index.These stocks are worth watching to see if the removal process causes any forced selling that makes them more attractive.