At the conclusion of each quarter, a reshuffle occurs within the FTSE 100. It involves the demotion of certain stocks and the promotion of others into the index.
This realignment hinges on the market value of stocks at the quarter’s close, facilitating the inclusion of companies that have entered the largest 100 companies by market capitalisation.
Does it mean anything?
Being on the FTSE 100 is broadly considered more prestigious than being on the FTSE 250. It can also confer benefits such as increased visibility, greater institutional interest, and a higher profile among investors.
Moreover, FTSE 100-listed firms are often seen as industry leaders and tend to attract more attention from analysts, media, and potential investors.
Collectively, this can result in increased attention from investors and potentially a boost in stock price due to increased demand from index funds and institutional investors that track the UK’s lead index.
On the other hand, being relegated from the FTSE 100 to the FTSE 250 can be perceived as a setback. In turn, this can lead to a fall in visibility and reputation, potentially leading to reduced investor confidence.
As it stands, pharmaceuticals firms Dechra and Hikma, as well as Marks & Spencer Group and Diploma, are set to join the FTSE 100. This is because their market valuations have overtaken current FTSE 100 constituents abrdn, Persimmon, Johnson Matthey and RS Group.
Worthy of more attention?
FTSE 100 companies tend to trade at higher multiples compared to FTSE 250 companies. This is due to a number of factors including larger size, established reputation, and perceived stability. But as mentioned earlier, it’s also the case that the enhanced visibility of being on the blue-chip index can increase investor interest.
All three of these companies are worth of further consideration. Any investment requires thorough research, but here’s a short overview of the four promotion candidates.
Hikma, a generics manufacturer, has been one of the best performing stocks on the FTSE 350 over the past 12 months, as is up 50%. It currently trades at 14 times earnings.
Dechra, an animal supplements manufacturer, has seen its share price bounce up and down over the past 12 months amid buyout interest. However, over 12 months, the stock is up 12%. But it’s not cheap at 31 times earnings.
Marks & Spencer is perhaps more familiar to most investors. It hasn’t been in the FTSE 100 for four years. Having experience a rebound in sales, it looks set to return to the blue-chip index after a lengthy turnaround. At 12 times earnings, it’s on par with its supermarket peers.
Meanwhile, Diploma is a British-based business supplying specialised technical products and services. The stock surged in July after the firm announced that revenues had risen 9% in the first nine months of the year. However, it’s not cheap at 28 times earnings.