Do New S&P 500 Stocks Become Instant Winners?

Joining the index can be a mixed bag for stocks. Find out how some recent entrants have done.

Dan Caplinger
Dan Caplinger
Apr 6, 2014 at 11:30AM

Last week, the S&P 500 (SNPINDEX:^GSPC) jumped to new record highs before posting a steep drop on Friday. Yet even though many investors think of the S&P 500 as the benchmark against which they measure their own performance, what many investors don't realize about the S&P 500 is that it's a constantly evolving index, with additions and deletions happening on a regular basis. As it turns out, just because a stock gets into the S&P doesn't mean it's a guaranteed winner. Let's look at three new S&P stocks -- General Growth Properties (NYSE:GGP), Facebook (NASDAQ:FB), and Transocean (NYSE:RIG) -- enter the index. Let's take a look at how these three stocks have performed since joining the S&P.

Real-estate investment trust General Growth Properties has climbed almost 6% since joining the S&P in early December. The REIT has had a storied history, with its perhaps most notable achievement being that it was one of the rare companies whose outstanding shares survived the aftermath of bankruptcy proceedings. During the financial crisis, the operator of regional shopping malls faced the potential for collapse, but when commercial real estate didn't suffer quite as huge a hit as the residential housing market did, smart institutional investors made out like bandits by investing in General Growth's equity. With a 2.7% yield and the potential for growth, General Growth Properties still looks attractive to many investors even as brick-and-mortar malls remain under pressure.

Facebook made it into the S&P 500 in late December, and since then, the social-media giant has gone on a roller-coaster ride that has resulted in just a 3% net gain for the stock. In February, Facebook stock soared as the company continued to find ways to boost its mobile ad presence and monetize its growing customer base. But as investors started to grow more wary of the market's gains overall, social media became one of the areas that they moved away from the most, fearful of talk of bubble-like valuations. Facebook has plenty of potential, but it also has a checkered past for shareholders, and many don't have the same confidence in Facebook that they would from other companies.

Finally, Transocean joined the S&P in late October, and since then, it has fallen almost 9%. Investors have gotten nervous about the sustainability of the boom in deepwater drilling, especially as Transocean's aging fleet of rigs looks increasingly inferior to those of its many competitors with newer drillships and rigs at their disposal. The big question for Transocean is whether when contracts come up for renewal, customers will stick with their older equipment or flee to competing companies with more attractive rigs with greater capabilities. Unless Transocean moves aggressively to update its own fleet, recent drops could just be the beginning of a painful trend for investors.

The lesson for S&P investors is that just because a stock makes it into the prestigious index, it still has to perform well fundamentally in order to score further gains. Otherwise, the stock could find itself getting booted out of the S&P 500 just as quickly as it gained membership.