After the S&P 500 knocked three stocks from its ranks last week, CNBC’s Jim Cramer told investors why it is usually not a good idea to stick with these companies.
“When you see a stock that gets expelled from the S&P 500, please don’t bother to try to catch a bottom — you’re most likely catching a falling knife,” he said. “Historically, the odds are very much against you. If Standard & Poor’s doesn’t want them, well, you probably shouldn’t want them either.”
The S&P 500 evaluates the performance of roughly 500 of the largest publicly traded stocks and is seen as a bellwether for the market. The index accounts for about 80% of the U.S.’ market capitalization and includes stocks from a variety of different sectors, but especially information technology, health care and financial.
Last Friday, the index axed financial services outfit Comerica, biotech company Illumina and staffing firm Robert Half. At first glance, Cramer said he thought these stocks didn’t look too bad. But after looking at the performance of other stocks bumped from the broad market index, he said it is hard to support investing in them. While removal from the S&P 500 is not a “death sentence,” Cramer pointed out that of the four stocks dropped so far this year, three have significantly underperformed the benchmark index since their departure was announced. He also reviewed several other recent S&P 500 castoffs and found that most of those stocks have also underperformed.
Although buying an index fund is usually considered passive investing, Cramer said the S&P 500 is more actively managed than many realize.
“The team at S&P Global does a fantastic job of deciding which stocks to add and which stocks to subtract — that’s one of the reasons why I’m so comfortable with telling you to put a big slug of your savings in an index fund that mirrors the S&P,” he said. “There’s nothing passive about kicking out the weak and adding the strong.”
