What happened
Shares of Mr. Cooper Group (COOP +0.00%) and R1 RCM (RCM +0.00%) surged by double digits on Sept. 8, following the announcement that both stocks were being added to the S&P SmallCap 600 Index effective Sept. 21. On the other side of the coin, Pennsylvania Real Estate (PEI +0.00%) and Express (EXPR +0.00%) shares are falling hard on news they're getting bounced out of the index.
So what
Mr. Cooper and R1 RCM are being added to the SmallCap index on the basis of their respective growth out of the microcap ranks. The addition isn't just due to the increase of their market value, but also by growing sales and earnings. As a result, this move has put both companies on more growth investors' targets.
Image source: Getty Images.
The addition also lines up both stocks to be bought by index fund managers, including the iShares Core S&P Small-Cap ETF (IJR 0.12%). This index fund tracks the underlying SmallCap 600 Index and has over $43 billion in assets as of Sept. 4.
For PREIT (the common name for Pennsylvania Real Estate) and Express, the sell-off today is a product of being booted from the index on the continued deterioration of their market values and struggling businesses. PREIT is a mid-tier mall owner with a large pile of debt and struggling operations, while Express is a struggling specialty retailer that's seen dozens of its peers go bankrupt this year and could be facing a similar path.
Now what
2020 has been brutal for retail specialists and retail real estate owners exposed to the double-edged sword of the e-commerce transition and the coronavirus pandemic. That's certainly been the case for the two deletions: Being removed from a small-cap index is the least of their concerns, as 2020 is likely to prove the year these two either survive or go bankrupt.
Cooper and R1 RCM, on the other hands, are two businesses that provide in-demand services. Mr. Cooper is a residential lending and mortgage servicing company, while R1 RCM is a healthcare collections business.
Residential real estate is booming, and the boom could continue for years to come as more young people transition from renting to buying. For R1 RCM, the downside of the coronavirus pandemic could lead to more demand for its healthcare debt collection services.
Put it all together, and you can see the trajectory of these very different industries driving formerly successful businesses to the brink of bankruptcy, while the housing and healthcare trends are lifting today's additions much higher.
