Cryptocurrency stockpiler Strategy might have an obstacle in its path to S&P 500 inclusion — in the form of an “elephant” currently residing in the S&P Small-Cap 600 index.
That’s Stephens analyst Melissa Roberts’s term for Sandisk, the maker of storage devices whose red-hot stock in recent months has made it far bigger than any of its peers in the small-cap index.
Sandisk currently has a market capitalization of about $40 billion. No other member of the S&P Small-Cap 600 has a valuation above $11 billion.
S&P Dow Jones Indices has the option for quarterly index rebalances, which are announced on the first Friday of the last month of every quarter. The next batch of changes would be announced on Dec. 5 and become effective after the close on Dec. 19, assuming the index committee opts to swap out members, which doesn’t always happen.
The fourth-quarter update is typically the slowest for discretionary changes, according to Roberts, who said historical average turnover among S&P 1500 members is 0.4% in the period, versus 0.8% for the third quarter.
And while the committee has latitude in choosing what, if any, changes to make to the S&P 500 this time around, “the few changes they might do might be focused on cleanup, where you have outsized names” in their current indexes, Roberts told MarketWatch.
Because of Sandisk’s disproportionate size within the S&P Small-Cap 600 index, the company has a 2.6% market-cap weighting.
The index committee makes other changes when necessary, such as when a component is acquired by another component. Roberts noted that mergers tend to close around the end of the year and the beginning of the year, providing an additional pipeline for index changes.
Sandisk is newly eligible for S&P 500 inclusion on the heels of a 515% stock surge in the past three months, which reflects how the company has been able to capitalize on a booming memory market and raise prices dramatically.
Strategy MSTR, formerly known as MicroStrategy, is also freshly eligible for the S&P 500 this quarter, but Sandisk would potentially be a higher priority for inclusion because of the skewing impact it’s having on the small-cap index, Roberts noted. Strategy, meanwhile, isn’t in the S&P’s small-cap or midcap indexes.
Strategy is also the subject of investor debate over its status as effectively a cryptocurrency holding play rather than an operating business, and its stock is volatile due to its heavy correlation with bitcoin price action.
Sandisk’s stock is volatile, too, as the artificial-intelligence boom has driven stratospheric price gains for normally cyclical memory and storage stocks. For that reason, Roberts acknowledged it’s possible the index committee might “wait and see if the market cap and the price move stick.”
Both companies are classified as members of the information-technology sector, a grouping that’s underweight in the S&P 500. There are also two IT members of the S&P Mid-Cap 400 index — Pure Storage and Ciena — that have outgrown that index and could be candidates for migration, even though their market caps aren’t quite as out of whack relative to index peers as Sandisk’s is within the small-cap universe.
Pure Storage has a $27.8 billion market cap, and Ciena has a $27.1 billion market capitalization. A market cap of at least $22.7 billion is among the thresholds for S&P 500 inclusion, along with criteria around profitability, float and more.
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