The S&P 500 index is reshuffling its ranks to reflect a new mix of large American companies. As part of a complicated shuffle involving 10 different companies and three S&P indexes, electronics manufacturing veteran Jabil (JBL -0.18%) is rejoining the market-tracker index after a seven-year absence. With a market cap of $15.2 billion at the market close last Friday, Jabil will be approximately the 400th-largest component.
Here's what it means to Jabil and its various stakeholders as its stock rejoins the top-shelf S&P 500 index.
Will the index move affect Jabil's stock price?
The inclusion of a stock in the S&P 500 often leads to a positive impact on its price. This is partly due to increased visibility and credibility. Some investors prefer stocks that are members of a respectable market index such as the S&P 500, and many fund managers are bound by index-specific requirements.
That's especially true for index funds like the Vanguard 500 Index Fund ETF, which always matches the components of the chosen market index. These funds must buy some Jabil shares on Dec. 18, when the move takes effect. These required purchases can drive up demand, with positive effects on the stock price.
However, this effect can be short-lived, as market fundamentals eventually take over the job of setting stock prices. For Jabil, a well-established company with decades of operating history, this inclusion might reinforce investor confidence, but it's the underlying business performance that will ultimately dictate its stock trajectory.
What about the stock's liquidity and trading volume?
The onboarding of index funds and other index-loving investors will absolutely result in increased liquidity and higher trading volumes for Jabil's stock. Again, the immediate effect will look like a short-lived spike, but the index inclusion is more likely to have lasting effects on this level. The index move has significant effects on the stock's availability to certain investor types. The increase may be modest, but the effect is often detectable.
For Jabil, you'll see the usual single-day spike when the stock graduates from the S&P MidCap 400 to the more prestigious S&P 500 index, followed by slightly higher average daily trading volumes and narrower gaps between the stock's bid and ask prices. In other words, it should be easier to access the shares through your favorite stock broker, whether you insist on tight price controls with limit orders or prefer the instant trade execution of a market order.
Does the index inclusion affect Jabil's business operations?
The index boost is unlikely to help Jabil's electronics manufacturing business in any meaningful sense. The inclusion rewards Jabil for the past success of lifting its market capitalization back up to an elite level after a few disappointing years. The jump could lift the spirits of company employees for a while, and it just might serve as a selling point at the deal-seeking tables.
But these effects should be temporary and not overly powerful in the first place. After all, Jabil's stock price has nearly tripled in three years amid soaring financial results. Most Jabil associates already love working there and would recommend it to others, according to Glassdoor reviews.
So no, the upgrade to the S&P 500 won't boost Jabil's business results -- but the company is doing quite all right anyhow.
Jabil's financial health
Jabil experienced a few rough years about a decade ago, resulting in the stock's removal from the S&P 500 in 2014. The ongoing recovery started when Mark Mondello moved into the CEO office in 2013. It took him a few quarters to right the ship but the company's core numbers have been soaring for six years now:
JBL Revenue (TTM) data by YCharts
Mondello has passed the baton to Kenny Wilson, a longtime Jabil insider with deep experience in global operations. Mondello remains Jabil's executive chairman, ensuring a smooth change of control.
Of course, the executive shift also comes in the middle of a global economic crisis, which explains the dips at the end of the charts above. That's a commonly seen pattern across many different industries in the current economy, driven by the recent inflation crisis and the painful fiscal management tools used to fight that issue. Jabil's order flows and profits should get back to their fast-growing ways when consumers and corporations start spending money again. That could happen in 2024 or maybe a bit later. Either way, Jabil's financial future looks bright.
The company's future prospects
Jabil's return to the prestigious S&P 500 club caps off an impressive multiyear turnaround. The company has delivered outstanding growth under high-quality leadership -- and don't forget that Mondello stays close to Jabil's operations as the chief manager of long-term business strategy. With revenue, earnings, and free cash flows surging over the last six years, Jabil enters the next chapter from a position of strength.
For investors, the index inclusion draws fresh eyes to a potentially underappreciated stock. The boosted liquidity and trading volumes remove friction for building Jabil positions. And the validation of Jabil's size and quality reinforces conviction in its business strategy. While broader markets face uncertainty, Jabil offers recession-resistant diversity across many industries and geographies. Investors seeking a reliable growth stock outside the typical tech sector may find what they seek in Jabil.
