Each quarter, the FTSE rebalances. Given that the FTSE 100 is made up of the largest 100 companies by market-cap, this needs to stay consistent over time.
So if a stock has done poorly and the market cap has fallen, a firm could get relegated to the FTSE 250. Conversely, a share that’s soaring in value can get promoted.
With the latest quarterly changes almost complete, is it time for investors to buy?
Details of the reshuffle
Given that market-cap values change all the time based on the share price, the actual quarterly changes in September won’t be confirmed for another week. Yet as we currently stand, there will be a few promotions.
From the FTSE 250, Dechra, Hikma, Marks & Spencer and Diploma are very likely to move up (or back up for most of them) to the lead index. The relegated stocks that are probably going to make way are Abrdn, Johnson Matthey, Persimmon and RS Group.
To those that have been investing for some time, the stocks heading north aren’t particularly new. From my records, only Diploma hasn’t been in the FTSE 100 at some point in the past. Yet this doesn’t mean these companies aren’t worth buying.
Reasons to buy
One important factor to consider is the impact of exchange traded funds (ETFs) and other FTSE 100 tracker products. With the rebalancing, all of these funds will have to buy the new firms’ shares in order to accurately reflect the index.
Of course, FTSE 250 trackers will sell the stocks, but the amount of money in FTSE 100 products vastly outweighs its sister brand. Therefore, there could be a bump in the share price of the respective firms when the actual reshuffle is confirmed.
Aside from this, the main reason to consider buying any of the four relates to momentum. For example, take Marks & Spencer. The stock has rallied 69% over the past year, with a trading update earlier in August saying it expects interim results to “show a significant improvement against previous expectations”.
Clearly, the business is doing well and it doesn’t look like it’ll be running out of steam anytime soon.
Always read the details
Of the four companies, I feel it makes the least sense to buy Dechra. The company has agreed a takeover deal by a private equity company. So I don’t see a huge amount of rationale for investors to buy the stock now.
Even though I believe the other three would make good additions to any portfolio, they still have risks. For example, Diploma raised hundreds of millions earlier this year to acquire businesses to help fuel growth. Only time will tell if this strategy will work.
Ultimately, if the above stocks are confirmed next week to be heading to the FTSE 100, I think all (bar Dechra) would be smart purchases.