Facebook’s (FB) tremendous stock rally this year will end with a bang, as the company was invited to join the Standard & Poor’s 500 Index.
The move, which takes effect after the close on Dec. 20, recognizes the social network’s status as one of the biggest Internet companies in the world and lifts any remaining taint from its misbegotten IPO last May.
With a stock market value over $120 billion, Facebook goes in to the index as one of the 30 largest members. It will also be added to the mega-cap S&P 100 Index.
As discussed with Aaron Task on the attached video, aside from a short-term trading bump, the move doesn’t portend much for the long-term performance of Facebook shares. The company will still rise or fall based on its ability to keep its members interested and attract more advertisers.
Facebook shares have jumped 86% so far this year as investors realized that it was one of the few companies able to profit from the growth in mobile Internet usage.
It is true that S&P 500-tracking funds will have to add small stakes in Facebook, hence the small short-term stock rise. But, in the future, those huge funds will also be selling Facebook shares whenever investors decide to pull money out of stock index funds overall, which happens whenever market sentiment turns negative.
Studies of stock index changes have found that companies deleted from a major index tend to outperform the companies added. In that case, investors may want to consider buying Teradyne (TER), the test equipment maker that Facebook is bumping down to the mid-cap S&P 400 Index.
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