What happened
Shares of Diversified Healthcare Trust (DHC 0.83%), Simulation Plus (SLP -0.35%), and Hudson Pacific Properties (HPP -0.51%) are all moving higher today. As of 2:09 p.m. EDT, their shares were up 22%, 21%, and 5%, respectively. The reason? The S&P Dow Jones Indices announced that it is making a few changes to its stock market indexes today that will impact these companies (and a few others).
So what
Here's an overview of the announced changes:
- Hudson Pacific Properties is being added to the S&P MidCap 400. It is replacing Diversified Healthcare Trust.
- Diversified Healthcare Trust is being added to the S&P SmallCap 600. FGL Holdings (FG) is being removed from the S&P SmallCap 600 index because it will soon be acquired by Fidelity National Financial (FNF 1.37%).
- Simulations Plus is also being added to the S&P SmallCap 600. It will replace TiVo (TIVO), which is being acquired by Xperi (XPER). Xperi will remain a part of the S&P SmallCap 600 following the transaction, so TiVo really isn't going anywhere.
- Finally, Palomar Holdings (PLMR 0.78%) is being added to the S&P SmallCap 600. It will replace LSB Industries (LXU) in the S&P SmallCap 600 which "is no longer representative of the small-cap market space."
These changes will take place on Monday, June 1.
Image source: Getty Images.
Stocks often make big moves whenever news breaks that they are being added to or removed from indexes. That's because ETFs and other funds that track those indexes will eventually be forced to buy or sell their stocks to remain up to date with the updated list.
Now what
Being added to or subtracted from an index doesn't have much of an impact on the businesses themselves, so investors should remain focused on whether or not these companies are worth owning and do their best to ignore the day-to-day gyrations.
Diversified Healthcare Trust, which is a real estate investment trust that focuses on senior apartments, independent living properties, assisted living properties, and nursing homes, has been hit hard by the COVID-19 pandemic. Shares are down more than 50% year to date, so it is understandable why it is being moved from a mid-cap index to a small-cap.
On the recent conference call with investors, CEO Jennifer Francis noted that the company had collected about 86% of the rent that was due in May, but said it is "not immune to the economic effects of the stay-at-home orders our tenants are facing."
Simulation Plus, which produces software that is used in the drug discovery and development process, appears to be doing just fine in a COVID-19 world. Sales recently grew 22%, which exceeded management's long-term target, and the company ended the quarter with a stronger balance sheet than it had last year. Management noted that COVID-19 may delay some deals, but stated that "demand for our solutions remains strong."
Hudson Pacific Properties, which is also in the real estate business and focuses on office properties in California, has also been battered in 2020. Shares are down more than 30% from their February highs.
Hudson's CEO Victor Coleman did his best on the call with investors to provide reassurance, noting that they have more than $1 billion in liquidity at their disposal and that they have many high-quality tenants such as Alphabet, Netflix, Amazon, HBO, and ABC. They also collected 93% of total rents in April.
While all three of these businesses look like intriguing stocks at the moment, I must admit that Simulation Plus is the one that interests me most. It's growing fast, profitable, and has a rock-solid balance sheet. The stock is certainly not cheap today -- shares trade for more than 76 times trailing earnings -- but there's no doubt in my mind that this is a very high-quality business. I plan on tracking its progress with great interest.
