Google: S&P 500 wallflower

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Google: S&P 500 wallflower

Only 15 firms in the benchmark are worth more than Google. So how much longer will it have to wait?

By Paul R. La Monica, CNNMoney.com senior writer
January 9, 2006: 1:20 PM EST


NEW YORK (CNNMoney.com) – It seems silly to suggest that Google is unloved.

Shares are up nearly 450 percent since it went public in 2004. Analysts have been tripping over themselves to slap higher and higher price targets on the stock. (Do I hear $500? $550? $600!) And every product release by the company is met with rave reviews.


The waiting is the hardest part: Despite the stock's phenomenal surge, Google still has not been added to the S&P 500. 
 

Too big to ignore?
Standard & Poor's has added several companies to the S&P 500 that don't stack up to Google.

  Company   Market Value (billions)   Est. 2006 Sales (billions) 
Google   $129.2  $6.4 
Vornado Realty Trust  $12.3  $2.5 
Whole Foods Market  $10.7  $5.7 
Murphy Oil  $10.2  $2.4 
Public Storage  $9.3  $1.1 
E.W. Scripps  $8.1  $2.9 
Estee Lauder  $7.4  $6.5 
Patterson Companies  $4.5  $2.6 
 

data as of 1/6/06 
Source:  Thomson/Baseline



But in one important regard, Google (Research) is still being shunned. Standard & Poor's has yet to add Google to its benchmark S&P 500 index, a collection of stocks that, according to S&P, is supposed to be "a representative sample of 500 leading companies in leading industries of the U.S. economy."

At first glance, it appears curious, to say the least, that Google is not in the index.

"I'm a little surprised Google hasn't been brought in yet. The company's profitability and revenue was higher than needed even when they were private," said Martin Pyykkonen, an analyst with Hoefer & Arnett.

Now's the time...
Sure, it did only go public about a year and a half ago. But it's insanely profitable, on track to generate $6.4 billion in sales this year, actively traded and...here's the kicker...has a market value of about $130 billion.

Only 15 companies in the S&P 500 are worth more than Google.

And several recent additions to the index are much smaller than Google, including Vornado Realty Trust (Research) and Murphy Oil (Research).

"Obviously we are aware of Google," said David Guarino, a spokesman for Standard & Poor's. He would not elaborate on how close the company may be to getting added to the index.

But the matter of how long Google will have to wait is an important question since many popular mutual funds that mimic the S&P 500's performance would be required to buy the stock if it is added to the index.

"When the time comes, the Vanguards and other index funds of the world will have to buy Google so there could be some pop to the stock. That's certainly a sweetener," said Pyykkonen.

And some think that this time is rapidly approaching.

"It will happen in 2006. The S&P will acquiesce to market forces and put Google in," said Todd Campbell, president of E.B. Capital Markets, an independent research firm. "It's arguable to say that Google is at least as representative of its sector as [index members] Yahoo!, eBay or Amazon."

Realistically, there should be several openings in the coming year. Guarino said that Standard & Poor's strives to keep an appropriate sector balance in the index, and a few techs could be on their way out.

S&P 500 member Scientific-Atlanta (Research) is in the process of being acquired by fellow member Cisco Systems (Research) and will need to be replaced. And there is speculation that several other S&P 500 techs, such as Affiliated Computer Services (Research) and Computer Sciences (Research) could be takeover targets as well.

What's more, there are a bunch of small tech companies that could wind up getting booted out since they have fallen out of favor on Wall Street.

Telecom equipment firm Ciena (Research) has a market value of less than $2 billion and the company is expected to post a loss this fiscal year. Computer maker Gateway (Research) has a market value of just $1 billion. And chip firm Applied Micro Circuits (Research), with a market value of only $850 million, is the smallest S&P 500 firm by market value.

...or wait until next year?
Still, the index committee in charge of selecting stocks for the S&P 500 has shown Zen-like patience when dealing with companies that have beaten-down stocks. So there might not be as much turnover this year as one would expect.

After all, Calpine wasn't taken out of the index until after its CEO and CFO were ousted last year. In addition, Standard & Poor's announced it was removing Delta Air Lines just a month before it filed for bankruptcy and Delphi a mere day before its Chapter 11 filing.

Finally, Standard & Poor's is known for dragging its feet on letting Net stocks into the benchmark.

AOL, now a part of Time Warner (Research) (which also owns CNNMoney.com) wasn't added until 1998, six years after its IPO. It took Yahoo! (Research) three and a half years and closer to four years for eBay (Research). Amazon.com (Research), which went public way back in 1997, was added only last year.

But David Garrity, director of research with Investec U.S., said that he thinks the biggest factor keeping out Google is that its stock is not as widely held as the stock of other large companies. According to data from Computershare, more than 35 percent of Google's stock is held by company insiders.

"Some have said that it hasn't been added yet because it's closely held," Garrity said. "I would imagine that if there's another secondary offering or further insider sales that serve to increase the available float, you arguably get rid of that concern."

Garrity adds that he doesn't believe Standard & Poor's would wait as long as it did to add other Net bellwethers because Google has already proved that has a viable business model.

"Google is more profitable than the other major Internet stocks and is certainly growing at a rate much faster than all the others. The case for them being added to the S&P 500 becomes stronger every day," he said.