What If GameStop ($GME) Grows Up (& Enters The S&P 500)?
GameStop ($GME), the retail investor darling and the original "Meme Stock" has been doing really well recently.
The company does not capture the headlines it used to but that hasn't stopped the stock. It was up over 25% in August and is now up nearly 1000% year-to-date.
It is about to be in the news again: its earnings are this week (Wednesday).
This incredible performance has been very meaningful for the company as well as its stockholders:
For one, its popularity has allowed the company to raise over a billion dollars in new equity. This means they issue new stock at the current market price in order to take advantage of the investor interest and can then use that money for whatever they wish.
For another, there is now a lot speculation as to whether the stock will be included in a major US equity index of large companies: the S&P 500.
The reason for this increasing speculation is simple. The rising share price has meant that GameStop market cap has become larger than some of the actual companies in the S&P 500.
Now index inclusion may seem like a meaningless shift for a popular company but it is actually a big deal on a few fronts:
Being included in the S&P 500 would mean that many other ETFs, mutual funds and investing strategies that ONLY trade this major index would be forced to buy significant amounts of $GME stock.
This includes many of the most popular and cheap passive index funds that we strongly endorse you use.
So, yes, it may be a nearly bankrupt meme stock but it is also a very large company by market capitalization and, at some point, this can become a bit of a self fulfilling prophecy. Haters can still hate but if you can raise a lot of equity and investors have faith in you then.....you can be a really big company!
The potential of this index inclusion - and we stress that word "potential" - is leading to a lot of the current excitement in the usual places: Reddit's WallStreetBets, Twitter and beyond.
The logic for this renewed hype is pretty simple:
If a lot of new investors are forced to buy large amounts of GameStop ($GME) the price will rise even more, perhaps a lot.
It will also have a higher floor as well. So, some of the incredible appreciation over the last year would be be "locked in" or so goes the assumption.
For context, over $13.5 trillion is either indexed or benchmarked to the index, according to S&P Dow Jones Indices. As a result of this incredible size, rather obviously, the incoming flows would not be small.
Now, before you rush out and buy (more) $GME you should know a few things:
The S&P process for index inclusion is always murky.
Put simply, it is more art than science and it is also not very transparent. There is a S&P index committee but you do not even know who is on it let alone what they think of the particular company.
There are certain rules that companies should meet before inclusion such as they must be a certain size (currently over $13.8bn market cap).
Gamestop is now considered pretty big. At market close on Friday its market cap was over $14.56bn and it has already moved from the S&P small cap index to the mid-cap index this year (these are purely rules based).
This is already well above the smaller companies in the index.
It also must be a very liquid (i.e.: highly traded) stock. GameStop also fulfills this function and has enough of a float to qualify.
"Just because" can be a reason a company is not included in the index, though it's never stated quite so explicitly.
Long story short, the S&P 500 is full of 500 of the largest publicly traded companies in the US but not the 500 largest and the index provider can effectively exclude a company for a long time without really rejecting it either.
So, why not $GME?
Well, many reasons, frankly:
The company isn't profitable. And it hasn't been profitable in years. That means it consistently loses money which is problematic when you want to be included among the great and the good.
The current share price isn't supported by the company's fundamentals. As in, how many sales and revenues and, ideally, profits. That could change! But it isn't likely that S&P's committee will move early.
For understandable reasons, S&P the company is very protective over the flagship US stock market index. It doesn't want to do anything to damage or dilute the brand in anyway. And $GME is, of course, a famously risky stock.
Now, we could be wrong. There are many people who obviously think very highly of GameStop and there are serious executives who are very serious about trying to resurrect the company and regalvanize the business in a new direction. It is, in many ways, a very cool story and also a very American one.
It is hard not to root for the company to a certain degree.
But it's also pretty uncomfortable. Being forced to buy a highly unprofitable and highly volatile company that depends on memes to stay popular is rather unpleasant.
However, helpfully, this is where Pebble comes along.
Thanks to our Direct Indexing power you can suddenly have a choice with your still passive investments. This flexibility allows you to do two things:
Relax about whether the stock is included or not.
Continue to enjoy and even cheer for the GameStop story while also making sure that your savings will not suffer being collateral damage from some meme-gone-wrong tale that will be part of market lore and business school curriculums forevermore.
Until then, watch this space and also watch GameStop. Typically these stories, heartwarming though they be, do not end well. And the fallout sadly and usually lands particularly on average savers and investors.
But that doesn't have to the case anymore.
In a small way, we aim to give regular people the ability to avoid the more obvious financial car crashes and being fodder for some future case study of market folly.
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