American Airlines (AAL), Etsy (ETSY) and Bio-Rad Laboratories (BIO) will be dropped from the S&P 500 later this month to be replaced by Palantir Technologies (PLTR), Dell Technologies (DELL) and Erie Indemnity (ERIE).
Shares in the latter three companies popped on the news Monday, but it remains to be seen whether they're buys beyond the initial catalyst of being tapped to join the most widely tracked equity index.
Meanwhile, it's not surprising to see AAL, ETSY and BIO get the boot, as they were among the smallest and least material holdings in the S&P 500.
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Stocks tend to get a lift from inclusion in the S&P 500 because many trillions of passive dollars are held in products that track the index. The SPDR S&P 500 ETF Trust (SPY), the largest exchange-traded fund (ETF) in the world, has more than a half-trillion dollars in assets under management all by itself. The bottom line is that loads of funds and ETFs now have to pick up shares in PLTR, DELL and ERIE.
The changes "ensure each index is more representative of its market capitalization range," S&P Dow Jones Indices said in a statement. "The companies being added to the S&P 500 are more representative of the large-cap market space."
Tech stocks CrowdStrike (CRWD) and GoDaddy (GDDY) were added to the S&P 500 early this year. However, the collective market caps of the S&P 500's newest tech names won't move the needle all that much in a cap-weighted index dominated by Magnificent 7 stocks such as Microsoft (MSFT), Apple (AAPL) and Nvidia (NVDA).
Analysts' takes on PLTR, DELL, ERIE
Palantir is a tech company that specializes in big data analytics. With customers including the U.S. intelligence community and Department of Defense, its operations can be somewhat opaque. Meanwhile, Wall Street is split on PLTR's prospects over the next 12 to 18 months.
Of the 19 analysts covering the stock surveyed by S&P Global Market Intelligence, four call it a Strong Buy, two say Buy, six have it at Hold, three say Sell and four rate it at Strong Sell. That works out to a consensus recommendation of Hold, which is sort of like damning the stock with collective faint praise.
Valuation appears to be a sticking point between PLTR's admirers and detractors. That makes sense. After all, shares have essentially doubled over the past 52 weeks.
Speaking for the bulls, Argus Research analyst Joseph Bonner writes that "shares are highly volatile and priced at a premium." At the same time, the analyst says Palantir is a "highly differentiated software company reliant upon new AI-powered applications to expand its business. Our long-term rating is a Buy."
Dell, which sells everything from servers and software to information security services, has seen its stock rise almost 50% over the past year. (That's more than double the performance of the S&P 500.) Analysts see more upside ahead thanks to the build-out of all things to do with generative AI.
"Server and networking growth is impressive (+80%), given the momentum for AI servers that is propelling backlog growth," writes CFRA Research analyst Shreya Gheewala (Buy). "We like DELL's growing pipeline tied to Tier-2 cloud providers/enterprise customers, while Windows 10 end-of-life support and interest in on-device AI should propel commercial PC demand/pricing."
Of the 22 analysts issuing ratings on the stock surveyed by S&P Global Market Intelligence, 12 call it a Strong Buy, seven say it's a Buy and three have it at Hold. That works out to a consensus recommendation of Buy with high conviction.
Erie Indemnity might not be as well known as American Airlines or Etsy, but its market cap of about $27 billion makes it far more material to the benchmark index. Shares in the property and casualty insurance firm generated a total return (price change plus dividends) of 87% over the past year. That beat the S&P 500 by more than 60 percentage points.
Analysts see more outperformance ahead. Unfortunately, only two of them follow ERIE. One rates shares at Strong Buy. The other says they're a Hold. For what it's worth, that works out to a consensus recommendation of Buy.
"The combination of growing management fee income and investment income should allow Erie Indemnity to maintain a positive earnings performance through 2025, with our estimates suggesting growth in the 20% to 30% range," writes William Blair analyst Adam Klauber, who rates the stock at Outperform (the equivalent of Buy).
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