Yesterday, shareholders in chipmaker Advanced Micro Devices, Inc. (NYSE:AMD) and defense contractor SAIC, Inc. (NYSE:SAI) got what seemed like bad news. In the end, though, they might be the ones with the last laugh.
The two companies found out that they would get dropped from the S&P 500 index later this month. In their place, Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) and AMETEK, Inc. (NYSE:AME) will rise to the large-cap benchmark, giving up their places in the S&P MidCap 400 index to Advanced Micro Devices, Inc. (NYSE:AMD) and SAIC, Inc. (NYSE:SAI).
At first glance, the move might seem like the kiss of death for the two demoted stocks. Indeed, in after-hours trading, Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) climbed, while Advanced Micro Devices, Inc. (NYSE:AMD) fell sharply. What might surprise you, though, is that in the long run, it might be Advanced Micro Devices, Inc. (NYSE:AMD) and SAIC, Inc. (NYSE:SAI) that get the last laugh. Later in the article, you’ll find out why, but first, let’s look at how these four companies got to where they are right now.
The rise and fall of S&P stocks
Unlike the Dow, which only rarely makes changes to its components, the S&P 500 regularly shifts stocks among its many index products. S&P Dow Jones Indexes, which oversees the S&P 500, said that, given the fact that Vertex and Ametek both have market capitalizations of more than $10 billion, it made sense to add them to the premier index. By contrast, Advanced Micro Devices, Inc. (NYSE:AMD) has a less than $3 billion market cap, and SAIC, Inc. (NYSE:SAI) currently stands at $5 billion.
The two added stocks have both been strong performers in recent years, but they’ve taken very different paths to achieve their respective success. AMETEK, Inc. (NYSE:AME), which is a low-profile maker of electronic instrumentation and monitoring systems, has benefited greatly from its exposure to the aerospace industry. Making cockpit systems and sensor equipment for commercial aircraft, AMETEK, Inc. (NYSE:AME) is well-placed to profit from the expected upsurge in aerospace sales over the coming decades.
Vertex, on the other hand, has maintained a high-profile image, with its treatments for cystic fibrosis and hepatitis C showing great promise to deliver future profits. Unlike Ametek’s slow-but-steady rise, Vertex has tended to make great leaps higher in the wake of good news, with long periods of consolidation as investors weigh its prospects against those of its rivals in the increasingly competitive environment in the hep-C space.
Meanwhile, for the relegated stocks, different factors justified their exit. SAIC hasn’t performed badly, but it expects to complete its long-planned breakup into two separate companies this month, breaking an already smallish S&P member into two even smaller parts.
For AMD, though, substantial losses reveal its inability to match up to its chip rivals in the PC and mobile spaces. The stock has actually soared this year when Advanced Micro Devices, Inc. (NYSE:AMD) got its chips included in the designs for two major game-console releases for the newest versions of the PlayStation and Xbox, but whether those wins will produce a lasting recovery, or merely provide a brief respite from the company’s longer-term decline, remains to be seen.