Palm shares react to Nasdaq 100 inclusion with yawn

After shares in the company rise only slightly, some investors are left wondering what a tech stock has to do get any respect on Wall Street these days.

4 min read
Not all stock indexes are created equal, investors in Palm learned Monday.

Shares in the maker of popular handled computing devices edged up only slightly Monday, despite the news that they will soon be added to the Nasdaq 100--leaving some investors wondering what a tech stock has to do get any respect on Wall Street these days.

In Palm's case, the answer has to do with the value investors place on the Nasdaq 100 and other indexes, such as the more widely followed Standard & Poor's 500.

Shares of Palm closed up $1.44 at $53.88 on news that the company will replace Global Crossing on the Nasdaq 100. Global Crossing, which is moving to the New York Stock Exchange under the symbol "GX," gained 6 cents to $23.31.

Stocks added and removed from an index typically receive at least a short-term pop as investment managers who track the performance of the index add the shares to their portfolios to reflect new participants.

But the size of that pop depends on the index and the particular stock. In an extreme case, shares of Yahoo surged nearly 25 percent last December on the eve of being added to the S&P 500.

And that's the rub. Most analysts and fund mangers agree that joining the S&P 500 holds more weight than joining the Nasdaq 100 or even the widely watched Dow Jones industrial average. The reason: There's about $16.5 billion invested in the Nasdaq 100, a fund that is listed on the American Stock Exchange.

Meanwhile, there's $1 trillion invested in tracking the S&P 500, according to Andrew Whittaker, vice president of derivatives research at Lehman Brothers. In Palm's case, it is already a member of the S&P 500, having replaced 3Com on July 27 after the networking giant's spinoff of Palm was complete.

"To us the real big deal is the S&P," Whittaker said. "The rest are good to know, but they really have little discernable impact."

Bill Keithler, who manages the Denver-based Invesco Technology Fund, agreed.

"The Nasdaq 100 is not nearly as big a deal as the S&P 500," he said. "There are a lot of index funds that attempt to mimic the S&P 500. The Nasdaq 100, there are probably some index funds that attempt to replicate it, but it's certainly not as significant."

In addition to the vast numbers of index funds that openly mimic the S&P 500, many fund managers also quietly pick their holdings from this group.

"There are a lot of closet index fund managers," said Scott Cooley, a senior analyst with Morningstar.

In the long run, joining a major index provides little shelter from bearish investors, as reflected by the performance of two tech companies that were added to the Dow Jones industrial average almost exactly a year ago.

Intel and Microsoft were added to the index of 30 companies last October. Since then, Microsoft shares have climbed from $92 to a 52-week high of $120 but now trade around $69, leaving them down about 25 percent in the past year.

Intel shares have gone from a split-adjusted $35.58 to a 52-week high of $75 and back to their current price of $44.50, meaning they have gained about 25 percent since the Dow inclusion.

By comparison, the Dow has climbed about 5 percent, and the Nasdaq--where both companies' shares are listed--is up about 13 percent since last October.

As for being added to the Nasdaq 100, the effect on the shares of SDL and BroadVision shows that the price is influenced more by industry and sector trends than by being added to the index.

When it was announced that BroadVision would be added to the Nasdaq 100 last December, the shares were trading at a split-adjusted $35.79. When the addition took place about a week later, the shares had climbed to around $43, but they now trade at $27.

Meanwhile, SDL shares slipped slightly from the day of the inclusion announcement to the effective day--from a split-adjusted $86.50 to $82.44. However, the shares now trade around $228.

"I can say personally I have owned one company that was in the Nasdaq 100 and it turned out to be a real dud, so it's not a guarantee that it's going to do great," said Morningstar's Cooley.

According to Lehman's Whittacker, index fund managers who follow the Nasdaq 100 will only have to buy about 3.2 million shares of Palm, less than half its average daily trading volume of about 7 million shares--meaning that the increased buying can easily be absorbed with little disruption.

In addition, the Nasdaq 100 is "rebalanced" annually to reflect the 100 largest non-financial Nasdaq-listed stocks based on market capitalization. By comparison, the S&P 500 consists of stocks chosen for market size, liquidity and industry group representation.

According to the S&P Web site, "The goal is to add companies to the Index that are relatively stable and will keep turnover in the index low."