| Company | Market Cap | |
| Visa Inc | 52,684,342,094 | |
| American Express Co | 27,135,604,733 | |
| MasterCard Inc | 21,644,275,337 | |
| Capital One Financial Corp | 8,661,328,948 | |
| Discover Financial Services | 4,946,050,706 |
When a company is added to a benchmark index like the S&P 500 the stock usually gains strength and popularity. The reason behind this is there are a lot of funds which start accumulating shares of the stock added as they want to track the performance of the S&P 500.
I started paying attention to the S&P effect back when it was announced on mid day March 23, 2006 that Google (GOOG) was going to be added to the S&P 500 on March 31, 2006. I noticed Google popped over 9% after the news broke, and rose by over 7.5% the next day on the news, and continued to rally until the most recent market downturn.
Year to date there have been 11 additions (equally 11 deletions) to the S&P 500 index. To track the recent performance of how stocks react to being added to the S&P 500, I have selected the 11 stocks added this year, and calculated their % change the day it was announced that they were going to be added to the S&P 500 index (usually announced after hours, 1 week prior to the add date), and their performance since the announcement (by now all 11 have joined the index). The S&P 500 announces these changes before the company is added to the index unlike the Russell 3000, therefore the stocks will usually experience a great amount of buying on the news versus when it is actually added. I could not find the exact dates the news was released for all 11 of these companies, so for those stocks I could not find the date the news was released, I use a time of 1 week before the stock was added to the index.
| Company | Ticker | Date | Stock Performance | |
| Day Added | Since Added | |||
| DeVry Inc. | DV | 6/8/09 | 5.00% | 12.83% |
| FMC Technologies Inc. | FTI | 6/4/09 | 6.91% | -3.47% |
| Denbury Resources Inc. | DNR | 4/1/09 | 0.12% | -9.24% |
| Time Warner Cable Inc. | TWC | 3/27/09 | -5.05% | 16.65% |
| O'Reilly Automotive Inc. | ORLY | 3/26/09 | 1.80% | 8.80% |
| Northeast Utilities | NU | 3/16/09 | 1.63% | 13.36% |
| Ventas Inc. | VTR | 3/3/09 | 9.62% | 34.87% |
| Hormel Foods Corp. | HRL | 3/3/09 | 2.66% | 8.11% |
| Diamond Offshore Drilling Inc. | DO | 2/25/09 | 1.85% | 37.36% |
| Health Care REIT | HCN | 1/29/09 | 3.99% | -8.04% |
| Iron Mountain | IRM | 1/5/2009 | 13.41% | 44.98% |
To get a better idea of how Visa may react, we can look at Mastercard which was added to the S&P 500 on July 17, 2008, however it was announced after hours July 10, 2008. The stock quickly rose almost 5% after hours, but finished the next day of trading higher by 1.64% following the announcement. The shares rose higher by almost 14% by the day they were added, which happens to be the current 52 week high (290.96 on July 17, 2008). Mastercard is down 33.41% since it was added, but given the market we've had since July 2008 that is certainly understandable.
So if life takes Visa, then why not the S&P 500? I think it's only a matter of time before the king of credit cards gets added to the index. I have been accumulating Visa for a long time. Getting a spot in the S&P 500 is not my reason for investing in Visa, but it will be a bonus when they do get added to the S&P 500. I'll put my money on Visa because one it's a great American company (and icon), and two I think if (and it's also only a matter of time) retail rebounds (consumer confidence increases and people spend money) in the U.S., Visa is sure to benefit from it. I would buy Visa below 60 a share, which would put a dividend yield of 0.7% which isn't too bad considering they are expected to grow earnings by 25% over 2009, and 19% in 2010.
Another way to Invest in Visa: Using Leap Call Options
Another way I've been investing in Visa is buying the Leap 2011 call options. When Visa was in the low 40's early this year, I purchased several in the money call options for the January 2011 40 strike for less than $800 per contract. Today these same contracts can be sold at a bid of $2250 per contract. I do not plan on selling anytime soon as I have over 550 days until expiration, but I may look at selling half of the contracts out for the same expiration at a higher strike (also known as a call spread). Today I could buy the January 2011 60 strike call options for roughly $1300 per contract. Visa is at 62.26 per share, which puts this option in the money by $2.26, in order to break even from this position (assuming one waited until expiration) Visa would need gain 18.3% by January 2011 (this assumes Visa keeps their dividend steady, which would pay out 63 cents over this period).
So breaking this down one could open a long position with 100 shares of Visa today for $6,226, or the rights to 500 shares of the stock at $60 until January 2011 for roughly $6500. I think Visa is capable of getting to $100 by January 2011, but being conservative I'll take the current 52 week high, which is $82 a share. Let's say Visa is at $82 a share come January 2011 and I decide to get out of my position. If I opened a position with 100 shares of Visa I would have made a profit of $2,037 or 32.7% (includes dividends). If I opened 5 option contracts for the Visa January 2011 $60 strike I could exercise the options and purchase the stock on that day for $60 a share. This strategy would give me a profit of $4,500 or 69.2%. To learn more about options and opening a position like this check out my option E-Books.
This is a bullish strategy and note that if Visa is at $64.99 per share or less at expiration 100% of the investment will be lost, while a slight gain would have been made by purchasing the common shares.
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