What happened
Shares of fruit vendor Fresh Del Monte (FDP 1.97%) are on a tear this morning, up 14.6% as of 10:05 a.m. as investors clue in to the news that S&P Dow Jones Indices will be adding Fresh Del Monte stock to its S&P SmallCap 600 Index on Sept. 30.
Fresh Del Monte will replace supercomputer maker Cray (CRAY +0.00%) on the index, as the latter agreed to sell itself to Hewlett Packard Enterprise (HPE +5.56%) in May (and therefore disappear from the stock market).
Image source: Getty Images.
So what
And here's the thing: Investors' decision to bid up Fresh Del Monte stock ahead of its addition to the index makes sense. Upon its addition, mutual funds and ETFs geared to track the performance of the S&P SmallCap 600 index will have to buy shares of Fresh Del Monte -- regardless of price -- in order to accurately reflect the performance of the index itself. Such forced buying is likely to push Fresh Del Monte's stock price up, at least temporarily.
Now what
Of course, there's a downside. Investors seeking fast profits will be looking to sell their shares of Fresh Del Monte to the mutual funds and ETFs, creating selling pressure on the stock as well. After all, for every buyer of the stock, there must also be a seller.
Conclusion: Today's share price gains could be short-lived. In the long term, what should matter to investors is how Fresh Del Monte is doing as a business, not as a stock. And with sales up less than 1% year over year and profits up less than 10% in this year's first half, I'd say Fresh Del Monte is doing only so-so right now.
