What This Week’s S&P 500 Sector Reclassification Means For Traders

By: Wayne Duggan

There’s a major shuffle coming to the S&P 500 on Friday, September 21. S&P and MSCI will be renaming and expanding the Telecom sector, a move that could have subtle implications for the valuations of a number of popular stocks. Here’s an overview of what’s going down and what it means in the short-term.

Why The Change?

In addition to renaming the Telecom sector to Communications Services, S&P will be adding a handful of stocks from the Consumer Discretionary and Technology sectors.

The decision to reclassify a number of companies comes as part of an effort to rebalance the S&P 500. Prior to the reorganization, Verizon (VZ), AT&T (T) and CenturyLink (CTL) were the only three stocks remaining in the Telecom sector. In addition, the reshuffling will help mitigate the disproportionate influence of the Tech sector. Now that technology has become an integral part of just about every sector of the economy, it makes sense to rethink grouping every company involved in the tech field into one giant sector.

Which Stocks Are Impacted?

The following 24 stocks will join Verizon, AT&T and CenturyLink in the new Communications Services sector:

  • Activision Blizzard (ATVI)
  • Alphabet (GOOGL)
  • CBS (CBS)
  • Charter Communications (CHTR)
  • Comcast (CMCSA)
  • Discovery Communications (DISCA)
  • DISH Network (DISH)
  • Electronic Arts (EA)
  • Facebook (FB)
  • IPG Photonics (IPGP)
  • Netflix (NFLX)
  • News Corp (NWSA)
  • Omnicom (OMC)
  • Take-Two Interactive (TTWO)
  • TripAdvisor (TRIP)
  • Twenty-First Century Fox (FOXA)
  • Twitter (TWTR)
  • Viacom (VIAB)
  • Walt Disney (DIS)

In addition, eBay (EBAY) will be moving from the Technology sector to the Consumer Discretionary sector to join Amazon (AMZN) and other e-commerce stocks.

How will this impact trading?

The upcoming changes are likely to cause some volatility, especially around Friday’s close when the changes go into effect. ETFs and mutual funds that track the S&P 500—or the telecom, consumer staples, or technology sectors—will have to rebalance their portfolios on Friday to match the new indexes.

The volatility will likely involve Facebook and Alphabet, as the two stocks will combine to make up about 45 percent of the new Communication Services sector weighting. This could trigger unusual buying and selling pressure.

Bank of America analyst Justin Post said in a note that some stocks could move based on the relative valuations of their new peer groups.

“For FB and GOOG, the new Media & Entertainment group carries a lower average valuation (19x ’19 consensus P/E) than the prior Software & Services group (25x ’19 P/E), which suggests multiple compression risk,” he said in a recent note to clients. However, he added that Facebook and Alphabet’s average 23 percent revenue growth rate will likely help protect the stocks’ premium earnings multiples.

Investors who want diversified exposure to the new Communication Services sector can simply buy the new SPDR Communication Services ETF (XLC), which began trading on June 19.

Disclosure: the author holds no position in the stocks mentioned.

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