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S&P reshuffles index

S&P Dow Jones, the company behind the stock market indexes that bear its name has announced the June quarter rebalances for each of its Australian indexes including the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). Companies are selected for the index based primarily on market capitalisation. As many fund managers are forced to own stocks that are included in an index, this can lead to near-term volatility in stocks being “rebalanced”, with fund managers forced to sell out of companies which have been removed from an index and buy stocks which have been added.

While the rebalancing says more about the relative market capitalisation of companies than anything else, the movements can highlight to investors companies which have fallen on hard times and also companies which have been performing well.

Three additions

Three companies which have just been added to the S&P/ASX 200 Index also look to be growing earnings and could warrant further investigation by investors.

G8 Education (ASX: GEM) is a consolidator of childcare centres. G8 is founded and run by entrepreneur Mr Chris Scott who has a track record of creating shareholder value. Having only listed in 2007, the company now boasts over 160 centres and pays a dividend quarterly.

Domino’s Pizza Enterprises (ASX: DMP) is making and delivering pizzas to hungry customers almost everywhere. Under the stewardship of CEO Don Meij, Domino’s has expanded its franchise from Australia to Europe and even Africa.

STW Communications (ASX: SGN) is a diversified marketing and communications company that houses many individual businesses under its umbrella. Previously the company expanded too far and too fast, taking on too much debt. With the debt issues now under control the company is once again looking to expand, this time in Asia. Judging by the share price, the market appears to think this could be a winning strategy but Fools would be advised to stay alert to how often companies get themselves into trouble when they try and ‘conquer the world’.

Foolish takeaway

Just as companies entering the index can be worth studying to identify growth stories, keeping an eye on companies removed from the index can be a good idea too. It’s more likely that stocks not in the index are underresearched and underappreciated and therefore mispriced.

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More reading

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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