Shares of steel wire manufacturer Insteel Industries (NASDAQ:IIIN) jumped as high as 13.1% in early Friday trading, and were still trading up as high as 12.8% as of 10:30 a.m. EST.
There's a reshuffling going on among the various S&P indices of stocks. Here's what's happening, in a nutshell: Apex Technology is buying Lexmark International (NYSE:LXK), and as the latter is removed from the S&P MidCap 400 index, a spot is available in that index. Former S&P SmallCap 600 member Littelfuse Inc. (NASDAQ:LFUS) is getting promoted into the MidCap index, thus opening up a spot in the SmallCap index.
Insteel is filling that spot. When stocks resume trading again on the other side of the weekend, on Monday, Nov. 28, Insteel will be part of the SmallCap 600 index.
Investors are presumably buying up shares of Insteel in anticipation of its inclusion in the new index, on the theory that financial services firms such as State Street and Vanguard will now have to buy shares of Insteel to ensure they're tracking all the right companies in their ETFs. And yes, I suppose that's a valid reason to buy the shares in the short term.
Longer term, though, if you want to buy and hold Insteel stock, you'll want to focus on its valuation. In that regard, Insteel carries a $694 million market cap, with $59 million in cash on its books, and no debt to speak of. The company reported $37 million in GAAP profits over the past 12 months, and generated positive free cash flow of $42 million (according to data from S&P Global Market Intelligence).
Adjusted for its cash levels, the stock sports a P/E ratio of 17, and an enterprise value-to-free cash flow ratio of 15. Analysts forecast 16% long-term earnings growth for Insteel, and this, combined with the stock's 3.7% dividend yield, points to a very attractive total return of nearly 20%.
Long story short: Some investors like Insteel today as a short-term play on S&P index reshuffling. Long-term investors should love it because Insteel is really a cheap, high-quality stock.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he currently ranks No. 330 out of more than 75,000 rated members.
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