Shares of Mercer International (NASDAQ:MERC), a maker of bleached softwood kraft pulp used in paper products and biofuel, were turbocharged today when the S&P Dow Jones Indices announced that the stock will replace Green Dot (NYSE:GDOT) stock on the S&P SmallCap 600 index before market open on Friday, Jan. 18.
Mercer stock was up 18.7% on the news as of 2:30 p.m. EST on Wednesday.
What does the one event have to do with the other? Simply put, in order to accurately reflect the new composition of the S&P SmallCap 600 index, a lot of mutual funds and exchange-traded funds that track the performance of the index will soon have to purchase a small amount of Mercer International stock.
Momentum investors today are trying to get ahead of those changes in fund and ETF purchases by buying Mercer stock themselves.
Two things need to be kept in mind: First, it's entirely likely that at least some of the people buying Mercer stock today are anticipating a quick gain by Friday (which they've in fact received), and they can be expected to sell their shares at that time.
Second, for long-term investors, absolutely nothing has changed today to make Mercer a better (or worse) business than it was yesterday. This is still a commodity producer expected to grow its earnings at only mid-single-digit rates over the next five years. It's still a business with a hefty debt load of about $490 million. But by the same token, it's also still a stock selling for a very modest 7.3 times trailing earnings, and paying a very generous 4.4% dividend yield.
After Friday, I'd expect an investment in Mercer to become a whole lot less exciting than it's been today. But the stock's still cheap, and it's still earning good profits and generating great free cash flow. And for these reasons, I wouldn't be surprised if it continues rewarding investors for years.
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