Shares of NeoGenomics (NASDAQ:NEO) were up 12.4% at 12:19 p.m. EST on Wednesday after the S&P Dow Jones Indices added the company to the S&P SmallCap 600 index. The medical diagnostics company replaces Engility Holdings, which was purchased by Science Applications International.
The index officially changes on Monday, but investors are buying now, hoping that they'll see a bump when mutual funds and exchange-traded funds (ETFs) that track the S&P SmallCap 600 index start buying shares. Depending on their tracking rules, some of those funds may be buying now, adding fuel to the fire.
Of course, that fire may burn out quickly. There's no fundamental reason why NeoGenomics should be worth more today than it was yesterday; today's bump is simply a product of there being more investors/speculators wanting to buy than investors interested in selling. When that ratio goes back to equilibrium, shares often revert to the previous valuation.
Although buying simply because a company was added to an index is usually a horrible idea, NeoGenomics might be worth a closer look. Given how many small-cap companies are out there, the S&P adding a company to the index is a decent reason to do some deeper research.
Investors in NeoGenomics can ignore today's jump and focus on the fundamentals, which have been pretty solid recently, with revenue up 17% in the third quarter. The bulk of the company's revenue comes from genetic testing directly for patients, which was up 14% year over year. But investors should watch the company's push into testing patients in clinical trials for drug companies. Revenue in that category increased 21% year over year, and the backlog of pharma services increased 75%.
NeoGenomics is looking to accelerate its growth with the acquisition of clinical oncology laboratory Genoptix, which closed last month. The acquisition is expected to add $85 million in annual sales, a 30% addition to 2018 guidance, and to be breakeven on an EBITDA basis in the first year following the acquisition.