What happened
Shares of construction supplies company Builders FirstSource (BLDR +4.28%) are booming this morning, up a solid 10% through 10:10 a.m. EDT, on news that the company's stock will be added to the S&P MidCap 400 index of companies.
So what
This isn't an award for exceptional performance per se -- and membership in the stock index isn't something that Builders FirstSource actively sought -- but neither is it an unearned participation award.
Image source: Getty Images.
S&P Dow Jones Indices add (and subtract) companies from their various stock indexes based on company size, and the better a stock performs, the bigger its size (market cap) tends to get. In the case of Builders FirstSource, Q2 2020 earnings were pretty strong for a company contending with a nationwide pandemic, with sales remaining positive (up 2.2%) and profits growing 18.5%.
Now what
With Builders' stock market valuation now firmly in midcap territory -- $3.45 billion -- S&P is acknowledging that fact by adding it to the MidCap 400. The addition won't become official until Aug. 17, however.
Today, investors are rushing to buy the shares in anticipation of a wave of buying activity next week by funds and exchange-traded funds that track the index. They're "front-running" the trade -- and that's why Builders FirstSource stock is going up.
