How to Spot the Next S&P 500 Stocks Before They Join
|
Listen to this post
|
Did you get the memo?
On March 1, something extraordinary happened for two marquee companies.
Super Micro Computer (SMCI) and Deckers Outdoor (DECK) joined the most prestigious market group: the S&P 500 Index.
And while SMCI gets all the attention lately (after a 20x return in less than two years, I can’t blame them), don’t forget that TradeSmith Daily was all over this meteoric move back in January.
The less-loved Deckers should also be on your radar. If you recall, back in the heated bear market in October 2023, I told you to zero in on Deckers because of its fantastic fundamental picture.
Today, we’re going to cover what I believe is the most important metric that these two companies share.
And it’s related to one of the selection criteria for being added to the S&P 500.
After all, if it’s good enough to be added to the S&P 500, chances are it’s good enough for you.
One Factor that Makes DECK an S&P 500 Stock
Likely surprising to many, the S&P 500 stock-selection criteria is quantitative. That’s right — the passive benchmark is rooted in analytics!While the criteria for new companies added to the SPX isn’t fully known, we do know a few things based on the S&P Global link above. The committee selects companies by:
- financial viability
- public float
- adequate liquidity
- And company type
The S&P committee looks for four consecutive quarters that, when combined, form a year of profitability by GAAP (generally accepted accounting principles) standards.
In other words, profits are critical! If you plan to have long-run success as an investor, focus on companies growing their profits.
And that brings me to Deckers.
Back in October, I listed out the diluted earnings per share (EPS) for Deckers since 2018. Back then the estimated EPS for 2024 stood at a solid $23.65.
Wall Street was behind the ball on this juggernaut because the latest estimate pegs 2024 EPS at $27.03… and now 2025 is targeted at $30.24:
This stairway to heaven, of continually growing earnings year after year, is what’s important. The best companies I’ve ever found grew earnings year after year: Microsoft, Google, and Visa, for example. (Disclosure: I own shares of all three of these companies.)
Lots of companies can grow their revenues, but managing expenses is critical. Having a bottom line in the green tells you the business is “viable.”
Now let’s do the same exercise for Super Micro Computer. Below you’ll see the annual diluted EPS since 2018.
Feel free to print this sucker out and stick it on your refrigerator. This is a beauty!
On a five-year basis, EPS has zoomed at a 66.8% compound annual growth rate (CAGR). In 2024 the estimated diluted EPS stands at $21.78, nearly double 2023’s $11.43:
I say, forget stock charts. Focus on growing profits instead.
If you simply focus your attention to the growth of the bottom line, you’ll save yourself a lot of headaches.
Ultimately you’ll find that your universe of potential investments shrinks to just contenders, rather than pretenders.
The S&P 500, one of the greatest indices on Earth, is focused on the profit growth of each of its constituent businesses. Shouldn’t you?
This is why using a quantitative process can help lead you to success.
TradeSmith uses this exact process to guide thousands of investors toward quality companies based on their technical and fundamental attributes.
By focusing on the few firms growing profits like clockwork, chances are the next crop added to the S&P will be on your radar ahead of the announcement.
Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily