Shares of Grocery Outlet (NASDAQ:GO) jumped nearly 10% on Tuesday after news broke that its stock would be added to the S&P MidCap 400 index.
Grocery Outlet's stock will replace that of Brinker International in the mid-cap index, which typically includes mid-size companies based in the U.S. with market capitalizations between $2.4 billion and $8.2 billion.
The change will take place prior to the market open on June 25. At that time, funds that track the S&P MidCap 400 index will need to buy Grocery Outlet's shares. Many traders likely bought shares today in hope of front-running those funds' purchases.
While inclusion in a popular index can certainly impact a stock's price in the short term, it won't have a material impact on the long-term value of a business. Instead, a business' fundamental drivers matter most in this regard.
Fortunately for investors, Grocery Outlet does appear to have some strong potential growth drivers. The discount grocery chain provides its customers with savings as high as 70% on an ever-changing selection of goods. These sizable savings and treasure-hunt shopping experiences help to drive traffic to Grocery Outlet's stores, thereby making it somewhat resistant to the threat of online grocery retailers.
In turn, Grocery Outlet believes that it can ultimately expand its store count to roughly 4,800 U.S. locations, up from about 350 today.