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Vulnerability of Small Market Value Companies

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Andrew R. Michaud

• December 02, 2023

The recent decision made by S&P Dow Jones Indices to replace Dish Network with Palo Alto Networks in the S&P 500 has shed light on the susceptibility of companies with small market values to removal from this prominent index.

Dish Network's Exit

Dish Network, identified by the ticker DISH, currently holds the position of the second-smallest company in the S&P 500 based on its market capitalization. However, it is set to be removed from the index on June 20 as part of the quarterly rebalancing process. Dish Network's market value is currently estimated at $3.7 billion.

Impact of Company Size

Companies with smaller market capitalizations face the risk of being dropped from the S&P 500 due to their diminished influence on the overall index, which assigns weightage based on market values. As a result, these smaller companies are often better suited for inclusion in the S&P's mid-cap 400 and small-cap 600 indices.

Accommodating Larger Companies

S&P Dow Jones Indices aims to accommodate larger companies that have the potential to make a more significant impact on the overall index. This further emphasizes the need for companies with higher market values to occupy positions in the S&P 500.

Potential Candidates for Removal

Besides Dish Network, there are nine other companies with relatively small market values that statisticians at Dow Jones, the publisher of S&P 500, have identified. These companies, listed below in ascending order of market value, could also face removal from the index:

1. Newell Brands (NWL)
2. Lincoln National (LNC)
3. Advance Auto Parts (AAP)
4. Zions Bancorp (ZION)
5. Organon (OGN)
6. DXC Technology (DXC)
7. Comerica (CMA)
8. Sealed Air (SEE)
9. Alaska Air Group (ALK)

It remains to be seen how these companies fare in the future and whether they will be able to maintain their positions within the S&P 500.

Nine Companies with Declining Market Values

These nine companies have experienced a significant decline in their market values over the past year, ranging from $3.6 billion to $5.9 billion. In fact, six of these companies have seen negative returns of 40% or worse.

Exclusion from S&P 500

Due to their market values falling below the current minimum requirement of $12.7 billion for the S&P 500, these nine companies would not qualify for inclusion in the prestigious index. However, they are better suited for the S&P mid-cap index, which includes companies with market values ranging from $4.6 billion to $12.7 billion, or the small-cap index, which admits companies with market values ranging from $750 million to $4.6 billion.

S&P's Approach to Inclusion

The S&P 500 does not frequently make changes to its composition, nor does it typically remove companies below its inclusion threshold. However, it does focus on companies with small market values.

Recent Changes

This year, the S&P 500 has made six changes in its composition. Aside from Dish, which was removed from the index, three failed banks—First Republic Bank, Signature Bank, and SVB Financial—were also dropped. Additionally, Vornado Realty Trust and Lumen Technologies, with market values below $5 billion, were removed from the index. On the other hand, Palo Alto Networks, Axon Enterprise, Fair Isaac, Bunge, Insulet, and GE Healthcare have been added to the S&P 500.

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