What happened
Shares of consumer electronic outfit Sonos (SONO -0.93%) were up 14.8% as of 3:40 p.m. ET Monday, according to data from S&P Global Market Intelligence, mostly in response to news that Standard & Poor's is adding the stock to its S&P 600 Small Cap Index.
So what
S&P Dow Jones Indices -- the arm of S&P Global (SPGI 0.07%) that maintains several well-known market indices like the S&P 500 (^GSPC 1.02%) -- issued the announcement after Friday's close, notifying investors and fund managers that the S&P 600's makeup would be undergoing a slight change. As of this coming Wednesday, Chart Industries (GTLS -1.32%) will be moved from the S&P 600 Small Cap Index to the S&P 400 Mid Cap Index, replaced by Sonos.
Image source: Getty Images.
News of being added to an index can spark pre-emptive buying from investors looking to capitalize on impending institutional buying. Any fund company that maintains an S&P 600-based fund must now buy shares of Sonos to properly reflect the index they're trying to mirror. Such a wave of buying, of course, can buoy a stock's price that may not have otherwise been lifted.
Now what
While an inclusion in an index is a victory of sorts for a young company in that it forces institutional interest in that organization, it's not exactly a reason to buy it. And it's certainly not a reason to buy it now, after the news has been circulating for three days.
See, a company's stock ultimately reflects that organization's future potential, and Sonos' future isn't any brighter simply because it's becoming part of the S&P 600. If anything, shares may be ripe for a little weakness headed into Wednesday's transition, as too many speculators piled into it today on hopes that this is indeed the beginning of newfound bullishness. It isn't.
The good news is, Sonos is still expected to drive double-digit sales and profit growth this year and next, making any pullback a good buying opportunity for interested investors looking beyond today's headlines.
