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Why Grocery Outlet Stock Popped Today

By Joe Tenebruso – Updated Jun 23, 2020 at 4:38PM

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The supermarket chain is being added to a popular mid-cap index.

What happened 

Shares of Grocery Outlet (GO 0.42%) jumped nearly 10% on Tuesday after news broke that its stock would be added to the S&P MidCap 400 index.  

So what 

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. 

A stock chart that rises sharply and then begins to fall.

Grocery Outlet's stock rose sharply on Tuesday. Image source: Getty Images.

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.

Now what

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. 

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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