JDSWho? Some S&P stocks have got to go

There are several troubled techs in the S&P 500. And they are dragging down the index's returns.

August 18, 2005: 10:19 AM EDT
By Paul R. La Monica, CNN/Money senior writer

Small isn't beautiful

Some of the tinier techs in the S&P 500 are hurting the index.

  Company   Market value   Est. 2005 Rev.   YTD price ch. 
Applied Micro Circuits  $825M  $254M  -36% 
Gateway  $1.16B  $4.1B  -48% 
Ciena  $1.19B  $423M  -38% 
PMC-Sierra  $1.54B  $297M  -24% 
Symbol Technologies  $2.1B  $1.8B  -50% 
Tektronix  $2.18B  $1.0B  -19% 
JDS Uniphase  $2.52B  $709M  -52% 
 

* all data as of 8/16/05
Source:  Thomson/Baseline


NEW YORK (CNN/Money) – JDS Uniphase was supposed to report year-end results after the bell Thursday...instead, it announced on the morning of that it would need a bit more time to ready its numbers.

Now while investors always dread such delays, few might have cared much.

After all, the company lost money in its last fiscal year, and is expected to do so this year and next. And the stock, at about $1.50 a share, is 99 percent below its all-time high.

Even so, investors can't entirely dismiss JDS's results. If you own an index fund that tracks the S&P 500 or the SPIDER (Research) exchange-traded fund (ETF) known as Spiders then you have to care, because amazing as it sounds, JDS (Research) still is in the benchmark index, keeping company with the likes of Microsoft, Intel and other tech titans.

JDS Uniphase may be the most egregious example of a no longer relevant S&P stock. But it's far from the only one.

Too many tech laggards
The S&P 500 is largely viewed as a proxy for large-cap stocks. According to Standard & Poor's, a company needs to have a market value of at least $4 billion to be considered. The mean market value for S&P 500 stocks as of Aug. 16 was $22.8 billion.

Yet, once in the index, there's a lot more leeway. There are 23 tech and telecom stocks in the index with market values below $4 billion. And seven of them, including Applied Micro Circuits (Research), Gateway (Research), Ciena (Research) and PMC-Sierra (Research) have market values below $2 billion.

(Slight tangent. I think that Gateway, which I wrote about Tuesday, is a good value. But it's tough to justify inclusion in the index. The PC industry is represented more than adequately by Dell (Research), Hewlett-Packard (Research) and Apple (Research).)

Ten S&P tech companies are expected to generate $1 billion or less in annual sales, including QLogic (Research), Citrix Systems (Research) and Parametric Technology (Research).

Nine S&P tech or telecom members trade at a stock price below $5. That's a share price that many fund managers view as necessary before buying a stock in order to ensure that there is enough liquidity to easily trade it.

And then there are six high-tech members expected to lose money this year. In addition to JDSU, money losers include Qwest (Research), Unisys (Research) and Sun Microsystems (Research).

That these dogs live on in the index is a problem because they are dragging down the index's overall returns, which is of course troubling for anyone that owns an index fund or Spider.

Shares of JDS Uniphase have plunged more than 50 percent this year alone, for example. And the average price drop of the 23 stocks with a market value below $4 billion is 14 percent this year.

Some techs should get the old heave-ho
Fortunately, there is hope that some of the worst performers will eventually be banished.

David Blitzer, managing director and chairman of the index committee for Standard & Poor's, said that the committee doesn't want to make many changes to the S&P 500, preferring to only remove companies when they absolutely have to, i.e. if a member company is getting acquired.

But there have been recent examples of moves that have been made simply because a company is no longer performing up to snuff. In fact, struggling airline Delta (Research), which is flirting with bankruptcy, will be removed from the index at the end of trading Thursday.

"Clearly, in the extreme case there comes a time when we pull the plug and chuck a company out but we want to keep turnover really low," said Blitzer. "But if a company clearly and substantially violates the addition criteria it's a candidate for removal."

In addition to the market cap minimum, there are financial viability and adequate liquidity criteria. Power-One (Research), an unprofitable electronic components supplier, was booted from the S&P 500 earlier this year.

And late last year, check printer Deluxe (Research) and industrial products manufacturer Crane (Research), both with market values below $2 billion, were demoted from the S&P 500 to the S&P 400 Midcap Index.

Investors probably shouldn't expect a massive overhaul in the S&P 500 anytime soon. But it wouldn't surprise me if more and more techs continue to get shown the exit door over the next few years if they keep underperforming.

Although the S&P 500 is not a mutual fund, Blitzer is cognizant of the fact that many people make investment decisions based on who is in and out of the index.

"Monitoring of the index is, to a large extent, pretty much continuous," he said, adding that he and other committee members get a lot of lobbying calls from index fund managers.