The data is undeniable -- being added to or removed from a major index has a dramatic impact on stock prices over the next six months to a year. The NASDAQ-100 index is doing its annual update effective Dec. 23. Based on research from Schaefer's and raw numbers from the 2012 updates, investors clearly do better investing in the group removed from the index over the short run.
For 2012, the stocks added to the index gained in line with the NASDAQ-100 over both the six-month and 12-month periods. The removals from the index actually smashed the index with an average six-month gain of 43.5% versus 8% for the index. The 12-month numbers were not as impressive, but still very strong at nearly 69% versus 32% for the index.
Facebook and Netflix are prime examples of how the index changes typically add the strong stocks at short-term highs and remove weak stocks with more upside potential. The index removed Netflix to only watch it soar nearly 320% for the year. Facebook was added to the index and started out with a negative return for the first six months. Facebook eventually soared 100% by the time the year was up, but it highlights how the stock got overheated in the short term.
Based on these stats, investors should clearly stick to the stocks removed from the index. After several months, however, the stocks added to the index become more attractive. The stocks added for this year include DISH Network (NASDAQ:DISH), Illumina, NXP Semiconductors N.V. (NASDAQ:NXPI), TripAdvisor (NASDAQ:TRIP), and Tractor Supply Company.
DISH Network offers direct-broadcast subscription television services. The company continues to push forward with a full suite of services, including high-speed Internet, and there are constant rumors about it making an acquisition in the mobile space. A full suite of services would make DISH a real threat to cable and mobile providers that offer only one service or the other.
The stock has seen significant gains in the last year, even while missing earnings in three of the last four quarters. Analysts forecast limited revenue growth for the next couple years. But the consolidation in the general space, including mobile providers, has made the company an interesting consolidation opportunity. With the stock trading at 27 times forward earnings following strong gains in the last year, investors might want to place the stock on hold for now.
NXP Semiconductor is driving innovation in integrated circuits and discrete semiconductors. The company claims it creates solutions that enable secure connections for a smarter world. The former division of Phillips only recently changed its name to NXP.
For a list of additions to the NASDAQ-100, NXP has one of the more attractive valuations. The stock trades at roughly 11 times forward earnings estimates and only around two times revenue forecasts. Also, analysts have favorable forecasts for long-term earnings growth, likely due to the benefits of the spinoff from Phillips. The stock has seen significant gains in the last year, but it offers an attractive valuation that suggests it might not see the normal weakness of a stock added to the index.
Advising on trips
TripAdvisor fits the above Facebook example almost perfectly. The stock has seen a huge run prior to its addition to the index and trades at what most consider a high valuation of nearly 40 times forward earnings. TripAdvisor has a promising future, but the stock probably needs to rest for a few months before making another run.
The company offers reviews from real travelers, along with a wide variety of travel choices and planning features to book the perfect trip. TripAdvisor has more than 260 million unique monthly visitors, and more than 125 million reviews on 3.1 million travel options.
A hot stock that gets an extra boost from joining a major index might peak in the short term. The above stocks that are being added to the index effective Dec. 23 are ones for investors to keep an eye on with the 2012 additions eventually providing some solid gainers. The only problem is that over the last year, the average stock added to the index has only matched the performance of the index. DISH Networks, NXP Semiconductors, and TripAdvisor appear the most appealing long-term, but for the next few months, investors should check out the stocks removed from the index.
Mark Holder has no position in any stocks mentioned. The Motley Fool recommends NXP Semiconductors and TripAdvisor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.