Will J.C. Penney, JDS Uniphase, and U.S. Steel Leave the S&P 500?

The S&P 500 (^GSPC -0.46%) includes 500 of the largest and most influential companies in the U.S. economy. There's no requirement that the companies within the index be the biggest in the market, but when a company's market cap falls too far, it can signal a potential exit from the premier index. J.C. Penney (JCPN.Q), JDS Uniphase (VIAV -0.25%), and U.S. Steel (X 1.56%) are among the 10 smallest S&P 500 stocks by market cap. Let's take a closer look at the likelihood of S&P Dow Jones Indices evicting them from the S&P 500 in the near future.

The bottom 10
Here are the 10 smallest stocks by market cap in the S&P 500, according to S&P Capital IQ:

Source: S&P Capital IQ.

Any of these stocks could be candidates for deletion from the S&P 500. But the arguments in favor of cutting stocks are better for some companies than for others.

For J.C. Penney, the retailer's long failure to reach success with its turnaround strategy has many seeing the upcoming holiday season as its last chance to make meaningful progress. With the company making a strategic about-face in returning a former CEO to retake the leadership reins, J.C. Penney has many investors struggling to contemplate realistic ways that the retailer can avoid bankruptcy. Moreover, as investors lose confidence in the company, its rebuilding efforts could prove meaningless due to a loss of trust from J.C. Penney's suppliers.

JDS Uniphase, on the other hand, stands as an example of a company that has avoided the S&P 500 chopping block for years. Except for a brief spike upward in early 2011, the fiber-optic provider's stock has languished in a range close to where it currently trades, with negative guidance in the company's quarterly report earlier this week marking only the latest in a long series of setbacks. Although it's hard to blame JDS Uniphase for the negative impact of the government shutdown hurting its forward revenue expectations, the fact that the stock trades at a very high multiple to earnings makes one wonder why it has stayed in the S&P 500 as long as it has.

For U.S. Steel, this isn't the first time that a cyclical downturn has crushed the company's market capitalization. With its long history as a giant in the steel industry, it's tough for index managers to contemplate the fact that U.S. Steel has become a much less important part of the industrial sector than domestic peer Nucor and international giants like ArcelorMittal. The true test will come when steel demand starts to increase again, and if U.S. Steel doesn't participate in the next up-phase of the cycle, then it could be ushered to the S&P 500's exits.

Getting booted out of the S&P 500 isn't the kiss of death for companies, with some studies showing that deleted stocks actually do better after leaving the index. Nevertheless, it's a mark of shame from a reputational standpoint, albeit one that only reflects the economic reality of a company's decline from greatness.