Looking at stocks that have been added and removed from the NDX
The Nasdaq-100 Index (NDX) is made up of the largest non-financial companies. They recently carried out their annual rebalancing, adding six companies and removing six. The tables below show the six additions and removals, along with their 2019 returns and analyst buy percentages, according to Zacks. It turns out this is a good indicator over the next year for these stocks, but maybe not in the way you’re expecting.
Additions vs. Removals
There are 53 stocks trading that have been added to the NASDAQ 100 since 2010, and 48 that have been removed. I’m only considering the stocks added and removed in December during the annual rebalancing. I’m not considering stocks eliminated and added mid-year due to bankruptcy, mergers, etc. Looking at the returns over the next year from the date they were added/removed, the stocks removed have performed better. The average return across all the time frames for the stocks removed beat those added. Also, the percentage of the stocks beating the NDX is better for those removed. These numbers were even more skewed before last year (later I break it down by year).
One theory is that when the specific stocks that are to be added or removed are known, funds that replicate the NDX immediately begin buying the newly added stocks and selling the stocks to be removed. The stock prices on the additions are pushed above their fair value while the prices on those removed are pushed below their fair value. Over the next year, the stock prices naturally gravitate toward their fair value, meaning the newly added stocks will tend to underperform the ones removed. Similarly, positive sentiment can get boosted on stocks added to the index while those removed may be looked at less favorably. This contributes to the outperformance by those removed based on our contrarian philosophy.
Year-by-Year NDX Breakdowns
Here is a year-by-year breakdown of stocks added to the NDX versus those removed. Overall, of the stocks added to the index, barely one-third of the stocks beat the index over the next year. Of those removed, half beat the index. Furthermore, in six of the nine years, the stocks removed from the index were better than those added as measured by both average return and percentage beating the S&P 500 (SPX). As seen above, last year the additions were up huge on average and performed much better than stocks removed. Last year was an anomaly.
Based on all this, if you’re looking to add a stock for 2020, then you’ll tend to do better by picking from the list of stocks recently removed from the NASDAQ 100 Index.
