Excerpt from Barron’s quoting DataTrek’s Nick Colas:
…. “The companies that make up the S&P 500 change frequently, in response to events such as acquisitions, or corporate profitability or market capitalizations falling below required thresholds. But the recent economic disruption and market volatility could mean that the committee overseeing the index could have to replace more than 30 companies this year, according to Nicholas Colas, co-founder of DataTrek Research…
….A rule that requires businesses to post profits for four straight quarters to be included could mean companies like Tesla (ticker: TSLA) don’t make the cut. While Tesla’s market cap of some $150 billion is far beyond the $8.2 billion required for initial inclusion, it won’t be profitable now for several quarters—and Colas argues that could matter for investors.
“Based on existing financial requirements (profitability) and an already top-heavy (with technology) portfolio, there is a good chance important disruptive companies won’t make it in,” he wrote in a Tuesday research note. “How that changes the S&P’s long run return potential remains to be seen, but history is clear on the fact that returns come from disruptive companies first and everything else a very distant second”….
Read the full article here on Barron’s!