Editor’s note: This article was first published in December 2012 on 11 December 2012, the day before the IBEX 35 Technical Advisory Committee meeting; the candidates to leave and join the index refer to that review, whose outcome the article does not cover.
On 12 December, the IBEX 35 Technical Advisory Committee will decide which stocks leave Spain’s benchmark index and which join it, if there are any changes at all. At times like this, investors look for the best strategy to make money from the change. Logic tells us to sell the stocks that are about to leave the index and buy the ones about to join, but that logic could fail, as various analysts have shown.
In the betting pool investors run, we all know that the companies most likely to leave the index are FCC, Gamesa and Sacyr, and the ones most likely to join are Viscofan, Ebro and Jazztel. This is speculative information we all have, so the market has probably already priced it in. In other words, investors may already have sold the stocks set to leave and bought the ones set to join, and that would completely change our investment strategy.
In his book Leones contra gacelas (“Lions versus gazelles”), the analyst José Luis Cárpatos devoted a chapter to how stocks behave when they enter and leave indices, and concluded that stocks leaving an index tend to perform better than those joining it.
A study by Bill Hester, an analyst at Hussman Funds, found that between 1998 and 2005, over a 12-month period, stocks that left the indices gained 31% on average, while those that joined gained only 2%. Of course, that study was in the United States. In Spain, Cárpatos carried out a similar study of stocks that joined and left the IBEX between 1997 and 2005. Of the 25 stocks that left, only one fell over the medium to long term, and only four of them were down after three months.
On average, a stock leaving the IBEX was up 9.1% after three months. A company joining the IBEX had a 65% probability of falling, with an average drop of more than 3% after three months.
The reason for all this is simply that all the cards have already been played. Anyone trying to speculate on the Technical Advisory Committee’s decision forgets that the “visionary investors” have already speculated on these possible moves, so we are too late to apply the logic that an IBEX stock gets more visibility than one that has dropped out.
“When everything on the stock market seems so obvious, it’s time to remember that nothing on the stock market is obvious.”
Featured image: Carlos Delgado, CC BY-SA 3.0, via Wikimedia Commons.
