Here are three stocks to buy from the S&P 500, S&P MidCap 400, and S&P SmallCap 600 rebalancing
S&P Dow Jones Indices announced changes to the S&P 500, S&P MidCap 400, and S&P SmallCap 600 on Dec. 1 as part of its quarterly rebalancing. Along with a flood of information, it also shed some new faces to invest in now.
While some stocks are moving up to the S&P 500, others are moving down, and some are moving out of all three indexes. A total of 23 names are involved in some form with these rebalances. They are scheduled to take place on Dec. 18.
One of the names joining the S&P 500 is Uber Technologies (NYSE:UBER). To qualify for inclusion in the index, a company must generate four consecutive quarters of GAAP profitability. The ride-share company qualified after Q3 2023. It has the largest market capitalization of any company in the United States not in the S&P 500.
I’ll consider all 23 names involved in S&P Dow Jones Indices’ latest move for this article. Even those moving out of all three indexes could still be a buy worthy of your consideration.
However, at least one of the selections will be from the S&P 500, and two will be new constituents of one of the three indexes.
Builders FirstSource (BLDR)
Builders FirstSource (NYSE:BLDR) is one of the three new additions to the S&P 500. It joins the index with Uber and Jabil (NYSE:JBL). BLDR and JBL will be deleted from the S&P MidCap 400. Uber wasn’t in either of the smaller-cap indexes.
In January 2022, I included Builders FirstSource in a group of seven stocks that doubled in 2021 and could double in 2022. While it didn’t quite happen—BLDR stock lost 24.3% in 2022—BLDR stock is up 87% since my article on Jan. 14, 2022. That’s considerably better than the loss of 1.5% for the index.
At the time, it made an excellent candidate to be acquired by a larger company such as Berkshire Hathaway (NYSE:BRK.B). The manufacturer and distributor of building materials will be acquired eventually.
On Dec. 5, it held its annual Investor Day. While its free cash flow is expected to be $1.9 billion at the midpoint of its guidance, well off its record in 2022 of $3.3 billion, it’s still up nicely from 2021.
Based on an enterprise value of $21.9 billion, its free cash flow yield is 8.7%. Anything above 8% is value territory. When it comes to new faces to invest in now, start here.
Alaska Air Group (ALK)
Alaska Air Group (NYSE:ALK) is getting a significant demotion from the S&P 500 down to the S&P SmallCap 600. At least it wasn’t kicked out of the indexes completely.
Of all the constituents in the S&P 500, Alaska Air has the second-smallest market cap at $4.6 billion. Within the S&P SmallCap 600, it will have the 17th largest.
The company’s been in the news recently because of its $1.9 billion planned acquisition (including the assumption of $900 million in debt) of Hawaiian Holdings (NASDAQ:HA), the parent of Hawaiian Airlines.
According to airline industry experts, the deal makes sense for both carriers. However, receiving regulatory approval from the U.S. Justice Department is not a slam dunk.
Alaska Air plans to maintain the Hawaiian Airlines brand because of its strength in mainland-to-Hawaii travel. Otherwise, Alaska will run the two airlines as one. Alaska Air’s management expects the combination to deliver $235 million in annual cost synergies.
In addition to the synergies, Cowen Group analyst Helane Becker says that Alaska Air gains 61 aircraft, many widebody Airbus A330 and Boeing 787s. That gives it access to long-haul flights to and from Asia.
But as I said, the combination gives Alaska nearly 40% of the Hawaii-U.S. mainland market, considerably higher than any other U.S. airline. That will draw the DOJ’s closer inspection. You can see why this made our list of new faces to invest in now.
PJT Partners (PJT)
PJT Partners (NYSE:PJT) is a new addition to the S&P SmallCap 600. It has a market cap of $2.3 billion, which puts it in the top third.
I’d find it hard to believe that I’ve never heard of the company, especially since it was spun off by Blackstone (NYSE:BX) in October 2015. The PJT in its name stands for Paul J. Taubman, the CEO and founder of the global advisory-focused investment bank. Prior to PJT, Taubman spent nearly 30 years at Morgan Stanley (NYSE:MS).
PJT stock is up 252% since its spinoff from Blackstone. That’s considerably better than the 136% return for the S&P 500.
As a business, it’s doing just fine.
In the first nine months of 2023, its revenues were $825 million, 11% higher than in 2022, while its adjusted net income was $104 million, down from $133 million a year earlier.
While it’s never traded in triple digits, there’s an excellent possibility that it will move above $100 in 2024.
This is one that I’ll need to study more closely before recommending wholeheartedly. That said, I can’t see anything particularly troubling about its business. This is one of the top new faces to invest in now.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.